What happens during expansionary monetary policy?

During expansionary monetary policy, the primary goal is to stimulate economic growth, particularly during periods of economic downturn or recession. This is achieved primarily through lowering interest rates and increasing the money supply.

When interest rates are lowered, borrowing becomes more affordable for consumers and businesses. This increase in borrowing can lead to higher spending on investment, consumption, and overall demand in the economy. Additionally, increasing the money supply typically involves the central bank purchasing government securities or other assets, which injects liquidity into the financial system. The combination of lower interest rates and a greater money supply encourages economic activity, helps to reduce unemployment, and can lead to an increase in inflation if the economy is pushed beyond its productive capacity.

In contrast, the other choices refer to contractionary measures or inaction that do not align with the principles of expansionary monetary policy. Hence, the correct answer reflects the essence of how such a policy works to boost economic activity.