Federal reserve decreases the required reserve ratio.
Banks have more money to lend
Money supply increases
Interest rates fall
Households and business take out more loans
Purchases and investments increases.
There are two types of monetary policies, Expansionary and Contractionary.
The government decides the monetary policy based on the economy of a country. The government will have expansionary monetary policy when it requires more money in the economy. Interest rates are lowered and money supply is increased. This results increase in Gross Domestic products of the country and the economy strengthens.
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