Certified Financial Management Specialist Practice Exam

What typically occurs during expansionary policy?

1. Decrease in government spending

2. Increase in interest rates

3. Decrease in consumer confidence

4. Increase in money supply to stimulate growth

The correct answer is: Increase in money supply to stimulate growth

During expansionary policy, the primary goal is to stimulate economic growth, and one of the key mechanisms to achieve this is through an increase in the money supply. By increasing the money supply, the government or central bank makes more funds available for consumers and businesses to borrow and spend. This influx of liquidity typically leads to lower interest rates, which encourages borrowing and investment. As businesses and consumers spend more due to easier access to credit, aggregate demand in the economy rises, supporting higher output and potentially reducing unemployment. Expansionary policies can also include measures such as reduced taxes or increased government spending, but the specific option highlighting an increase in the money supply directly captures the essence of the intentions behind such policies. In contrast, the other options describe conditions that would generally align with contractionary policies. Decreasing government spending and increasing interest rates would likely constrict the economy rather than stimulate it, and a decrease in consumer confidence would also likely occur in reaction to economic downturns, not during an expansionary phase. Thus, the increase in the money supply is pivotal in fostering an environment conducive to economic growth.