Expansionary monetary policy boosts economic activity by increasing money supply

Steps:

• Define expansionary monetary policy as actions by the central bank to expand the money supply and lower interest rates.
• Identify tools like open market operations, reserve requirements, and discount rates.
• Evaluate options: Check if each increases money supply or stimulates lending.
• Select the option matching a standard expansionary tool.

Why A is correct:

• Buying government bonds is open market purchase, which injects money into the economy, increasing reserves and lowering interest rates per monetary policy definitions.

Why the others are wrong:

• B: Appreciation of foreign exchange rate tightens money supply by attracting foreign capital, which is contractionary.
• C: Increasing credit controls restricts lending, reducing money supply and acting contractionary.
• D: Raising the minimum lending rate increases borrowing costs, discouraging loans and contracting the economy.

Final answer: A