What happens to consumer spending during an expansionary monetary policy?

What happens to consumer spending during an expansionary monetary policy?

• A. It tends to decrease
• B. It tends to remain unchanged
• C. It tends to increase
• D. It becomes irrelevant

Answer: (C)

During an expansionary monetary policy, the central bank typically lowers interest rates and increases the money supply in the economy. This creates an environment where borrowing becomes cheaper for consumers and businesses. As a result, consumers are more likely to take loans for large purchases, such as homes and cars, and increase their spending on goods and services. With lower interest rates, disposable income tends to increase as individuals pay less in interest on existing debt or are encouraged to spend rather than save, further boosting overall consumer spending. Additionally, as businesses also benefit from lower borrowing costs, they may invest more in expansion, which can lead to job creation and higher incomes, further encouraging consumer confidence and spending. Thus, during expansionary monetary policy, it is common to observe a notable increase in consumer spending driven by these mechanisms, making this the correct choice.

During an expansionary monetary policy, the central bank typically lowers interest rates and increases the money supply in the economy. This creates an environment where borrowing becomes cheaper for consumers and businesses. As a result, consumers are more likely to take loans for large purchases, such as homes and cars, and increase their spending on goods and services.

With lower interest rates, disposable income tends to increase as individuals pay less in interest on existing debt or are encouraged to spend rather than save, further boosting overall consumer spending. Additionally, as businesses also benefit from lower borrowing costs, they may invest more in expansion, which can lead to job creation and higher incomes, further encouraging consumer confidence and spending.

Thus, during expansionary monetary policy, it is common to observe a notable increase in consumer spending driven by these mechanisms, making this the correct choice.