Question

What is a potential negative effect of an expansionary policy?

Answer 1

Answer:

Increased Inflation.,

Cutting interest rates isn’t guaranteed to cause a strong economic recovery. Expansionary monetary policy may fail under certain conditions.

If confidence is very low, then people may not want to invest or spend, despite lower interest rates.

In a credit crunch, banks may not have funds to lend, therefore although the Central Bank cuts base rates, it is still difficult to get a loan from a bank.

Commercial banks may not pass the base rate cut on.