‘Loose’ or ‘easy’ monetary policy is a policy which a central monetary authority, such as the Federal Reserve System seeks to make money supply and available into the market at low interest rates. An easy-money policy is often used to encourage investment and economic growth. Easy monetary policy will also be used when the economy is faced with the prospects of high unemployment rate.
How it effects on the main sectors of an economy?
With loose monetary policy a central bank will sets low interest rates so that credit is easily created. This makes borrowing easy for business, which stimulates investment and expansion of operations.
A loose monetary policy can affect the prices of goods, asset prices, exchange rates as well as consumption and investment. Interest rate cuts, for example, lower the cost of borrowing, which results in higher investment activity and the purchase of consumer durables. The expectation that economic activity will strengthen may also prompt banks to ease lending policy, which in turn enables businesses and households to boost spending. In a low interest-rate environment, shares market becomes a more attractive to buy, and raising households’ financial assets. This may also contribute to higher consumer spending, and makes companies’ investment projects more attractive. Demand for domestic goods rises when imported goods become more expensive as result of currency depreciation. All of these factors raise output and employment as well as investment and consumer spending. However, this stepped-up demand may cause prices and wages to rise if goods and labour markets are fully utilized.
However, if cheap money remains in the economy for too long, it can lead to a situation in which there is a glut of currency or too many dollars chasing too few goods and services leading to inflation.
Lower interest rates also tend to cause currencies to depreciate this may effect by overseas investors have less interested in investment in Australia. As a result