Monetary expansion is a macroeconomic policy that seeks to expand the money supply to encourage economic growth and fight inflation. One form of expansionary policy is monetary policy that is maintained through raising interest rates or changing the amount of money banks must keep in the vault. Expansionary policies can also come from central banks, which focus on increasing the money supply in the economy. The effect of an expansionary monetary policy is to lower the exchange rate, weaken the financial account and strengthen the current account. During recession there is a decline in activity throughout the economy. It is visible in industrial production, employment and real income. The indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP). Interest rates change when the Central Bank changes its monetary policy. When the Central Bank adopts an expansionary monetary policy, the money supply increases while interest rates fall. This is because when money is easily available in the economy due to monetary expansion, interest rates will decrease because people will be more willing to lend instead of take out loans. Reducing interest rates will cause domestic financial and capital assets to become less attractive due to their lower real rates of return. Beyond that, foreigners will reduce their position in domestic bonds, real estate, stocks and other assets. The financial account will worsen as foreigners hold fewer domestic assets. Domestic investors will be more likely to invest abroad due to the higher rates of return in that country. Interest rates are low when there is a high level of money... half the paper... upfront to avoid higher prices later. This drives demand faster, pushing companies to produce more and hire more employees. The additional income allows people to spend more causing greater demand. Businesses may respond to this growing demand by raising prices because they know they cannot produce enough. To stop inflation, the central bank uses restrictive monetary policy. This is where interest rates are raised and the bank sells its treasury reserves and other obligations. The reduction in the money supply limits liquidity and slows economic growth. In conclusion, monetary expansion will cause an increase in production, prices and interest rates with a decrease in unemployment rates in the short run. However, in the long run, output and interest rates will not change significantly, while price and income levels will continue to rise.