2.2. Types of Monetary Policy

Broadly, monetary policy can be of two kinds Expansionary Monetary Policy and Contractionary Monetary Policy. Alternatively, they are also called as Cheap Money policy or Dear money policy respectively.

Expansionary monetary policy increases the supply of money in an economy by making credit supply easily available. Money produced through such a policy is called as cheap money.

An expansionary monetary policy is utilized when an economy goes through a phase of recession accompanied by lower levels of growth and high levels of unemployment. For example in 2008-09 the entire world including India adopted an expansionary monetary policy to counter slowdown/recession.

But expansionary monetary policy comes with its own risks, such as inflation. Also, there is a time lag between the time when policy is announced and when it takes effect in the economy, thus at times the expansionary monetary policy may not have desired impact on the economy in terms of growth.

Contractionary monetary policy on the other hand, decreases the supply of money in the economy. Contractionary monetary is used to tackle the menace of inflation in the economy by raising the interest rates.