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What Is Easy Monetary Policy?

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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 05 September 2016
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Monetary policies are usually utilized to stimulate an otherwise lackluster economy. The economy could be underperforming due to factors like low consumption by consumers as well as lack of easy access to liquid cash, credit facilities and loans. Where this is the case, the major bank in that economy, which is the chief monetary policy maker, will engage in a practice known as easy monetary policy. The main attribute of this type of monetary policy is the fact that it seeks to manipulate the economy in such a way that consumers will have an easy access to money.

The main method by which the central bank disseminates the easy monetary policy is through the reduction of the interest rates. When the interest rates on loans and other forms of credit are low, this will encourage more people to obtain these facilities. When people are able to obtain loans, mortgages and other forms of credit, they can spend more on consumables and other items, consequently, increasing the rate of activity in the economy.

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An illustration of the concept of easy monetary policy can be seen in a couple's decision to obtain a mortgage in order to purchase a home. While the easy monetary policy is in effect, the couple will probably have a lot of choices as to what type of mortgage to obtain. They will also probably find it easier to meet the requirements for obtaining the mortgage since such standards are often relaxed during periods of easy monetary policy. The couple might also find out that the interest rates on the mortgages are very low during these periods, giving them the confidence to go ahead and purchase the home. This sort of behavior is precisely what those behind the introduction of easy monetary policy have in mind.

On the contrary, when the opposite of easy monetary policy is applied, it will increase the rates for obtaining such loans and credit facilities, making it harder for people to get money to spend. Even though an easy monetary policy stimulates the economy, this sort of rampant consumption and expenditure often has an unintended consequence in the form of inflation. The excesses of demand for goods and services that is fostered by easy access to money often leads to a situation where the high demand leads to a corresponding increase in the prices or value of such goods and services.

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ddljohn
Post 3

The economy has such a sensitive balance, economists must have such a hard time keeping up with it. An easy monetary policy is great. But like the article said, eventually, it's going to increase inflation so much that a restrictive or "tight" monetary policy will be necessary. I guess it's important to know where to stop with these policies. It's impossible to stick to one policy. The Fed has to keep up with economic changes and implement different ones.

bluedolphin
Post 2

@SarahGen-- No. I think the Central Bank also looks at employment and inflation rates before deciding on a monetary policy. If inflation is low but unemployment is high for example, an easy monetary policy is necessary. If inflation was too high, a restrictive monetary policy would be used instead.

So inflation, or the increase in consumer prices, is a major factor. When an easy monetary policy is in place, people will spend more, which will increase prices (and inflation) and stabilize the economy. Ideally, a country's monetary policy should be a neutral one. But that requires ideal inflation and unemployment rates which don't always occur.

SarahGen
Post 1

How exactly does the Central Bank determine that an easy monetary policy is necessary? What factors do they look at? Do they just look at spending?

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