Short Answer 
Expansionary monetary policy increases the money supply and lowers interest rates to stimulate economic growth, typically during downturns, while contractionary monetary policy decreases the money supply and raises interest rates to curb inflation when the economy is overheating. Understanding these differences is essential for recognizing economic strategies.
Step 1: Understand Expansionary Monetary Policy
Expansionary monetary policy aims to increase the money supply and lower short-term interest rates to stimulate economic growth. This approach is typically used during periods of economic downturn or low inflation. Key actions taken include:
- Reducing the discount rate, making borrowing cheaper.
- Buying government securities, which injects money into the economy.
Step 2: Recognize Contractionary Monetary Policy
Contractionary monetary policy, on the other hand, seeks to decrease the money supply and increase interest rates to curb inflation. This policy is applied when the economy is overheating. Major measures involved are:
- Increasing the required reserve ratio, which restricts how much banks can lend.
- Raising the federal funds rate, making borrowing more expensive.
Step 3: Differentiate Between the Two Policies
Recognizing the differences between expansionary and contractionary monetary policies is crucial for understanding economic strategies. Essentially, the two can be summarized as:
- Expansionary Policy: Increases money supply to promote growth.
- Contractionary Policy: Decreases money supply to control inflation.