Student Question

When does the government use an easy money policy as opposed to a tight money policy? 

Expert Answers

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The government uses an easy money policy to try to stimulate economic growth and it uses a tight money policy when it feels that the economy is growing too fast.  

An easy money policy is one in which the Fed increases the supply of money while a tight money policy is one in which the Fed decreases the supply of money.  When the Fed increases the supply of money, it is easier for people and firms to borrow money.  This allows businesses to expand and it allows people to buy.  These things stimulate economic growth.  By contrast, a tight money policy limits borrowing, thus cutting back on economic growth and preventing inflation.

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