Expansionary Monetary Policy Lowers Interest Rates

Steps:

• Expansionary monetary policy aims to boost economic activity by increasing the money supply.
• Central banks achieve this through actions like lowering reserve requirements or buying bonds.
• More money in circulation reduces borrowing costs.
• This leads to lower interest rates, encouraging spending and investment.

Why B is correct:

• Expansionary policy decreases interest rates via the money supply-interest rate inverse relationship, as defined in basic monetary theory.

Why the others are wrong:

• A: Bank lending increases due to cheaper borrowing.
• C: Budget deficit relates to fiscal policy, not monetary.
• D: Money supply increases to fuel expansion.

Final answer: B