Definition
Expansionary policy is a deliberate effort by government or a central bank to stimulate an economy that is growing too slowly or stuck in recession. It works by increasing aggregate demand, the total spending on goods and services across the economy.
On the monetary side, a central bank loosens by cutting interest rates, buying bonds, or lowering reserve requirements. On the fiscal side, a government loosens by raising spending or cutting taxes. Both channels put more money into circulation and encourage households and firms to spend.
Why it matters
How it works
When a central bank cuts its policy rate, loans for homes, cars, and business investment become cheaper, so households and firms borrow and spend more. Greater demand prompts firms to expand production and hire workers, which raises incomes and spending further. Fiscal expansion does the same by injecting government demand directly or by leaving households with more after-tax income. The effects take time to appear, so policymakers must act based on where the economy is heading. The risk is timing: stimulus delivered too late or kept too long can arrive when the economy no longer needs it, adding to inflation rather than growth.