easy money policy
An easy money policy is a monetary policy that refers to a situation where money supply increases in the economy as a result of lower interest rates. Interest rates decrease in the short run because the central bank of the country may decide to lower the rate of interest paid by the other commercial banks who usually borrow money from it. This leads to a corresponding decrease in the overall interest rates in the market, and investors can borrow more because they will pay lesser interest rates for borrowing, or it is less expensive to borrow funds. This, therefore, leads to increased investments and increased domestic consumption because their demand for goods will generally increase.
The interest rates can, however, increase in the long run owing to the liquidity effect. Friedman (1999), outlined that the increased money supply also increases the opportunity cost of holding stocks and cash and will be followed by a temporary fall in the nominal rates of interest, that is, the interest rate before inflation is taken into account becomes lower.
Once there is reduced money in circulation, it leads to a rise in the real interest rates; that is, the interest rate after inflation has been considered. Because of this, the demand for credit becomes more, and the lenders price their loans higher to take advantage and earn a lot from the aggregate increase in demand for loans. This, therefore, shows that an easy money policy will lower the interest rates in the short term but can result in an increase in the prices of interest in the long run.