What is monetary expansion? Discuss the impact of monetary expansion in terms of price level, interest rate and inflation.

Monetary expansion

Monetary expansion refers to the increment in supply of money by the central bank in an economy. The government adopt monetary expansionary policy to control the deflation rate in an economy. The government can increase money supply through the creation of new currency, decrease in the cash reserve ratio and by repurchasing the securities from the public.

Impact of monetary expansion in terms of price level, interest rate and inflation

If the government increases the supply of money in an economy the interest rate will be decrease. Due to the decrease in interest rate public demand more cash for purchasing goods and services which leads to increase in demand of goods and services. In short run the supply of good and services cannot be increased which results in the higher demand of goods and services over supply. Due to the higher demand over supply of goods and services the price of goods and services will be increase which leads to increase in general price level of goods and services in an economy. Due to the increase in the general price level of goods and services the purchasing power of money will be decrease. Due to this the inflation rate will increase in an economy.

In conclusion, due to the increase in money supply the interest rate will fall which leads to increase in demand of fund for purchase goods and services resulting increment in general price level which finally increase the inflation rate in an economy.