Money and the Federal Reserve Practice Exam

Expansionary monetary policy is about stimulating economic activity by making credit more available. The central bank increases the money supply, which tends to push down short‑term interest rates. Lower rates encourage households to borrow for consumption and businesses to borrow for investment. As borrowing and spending rise, overall demand increases, helping real GDP grow and unemployment fall. The other options describe actions that oppose this policy (lower GDP or higher interest rates) or miss the broader aim of boosting demand and activity.