Respuesta :
A Contractionary monetary policy also known as Restrictive monetary policy, involves decreasing the money supply to achieve an increase in interest rates thus provoking a reduction on investments and consumption in that particular economy.
The principal objective of Contractionary or Restrictive policy is to fight inflation which can be a sign that that the economy is overheated. When this happens, the central bank wants to slow slow the economic growth by making lending more expensive when they increase interest rates.
There are many reasons for a government to implement a Contractionary fiscal policy and the most commons are, when it believes that the economy is suffering from high inflation and when the national debt of the country is too high.
The monetary policy that involves the decreasing money supply is contractionary monetary policy.
Further explanation:
Brief about monetary policy:
The central bank controls the supply of money in the economy through its monetary policy. It either increases or decreases the money supply to stabilize the economy using the monetary policy tool. In the scenario of excess demand, in order to prevent inflation, central bank uses contractionary monetary policy that is reducing the money supply in the economy. And in the scenario of low demand, central bank uses expansionary monetary policy in order to raise the output level of the economy.
The rationale behind contractionary monetary policy:
The principal objective behind the contractionary monetary policy is to cope up with the rising inflation that could have occurred due to the high level of aggregate demand. Central bank by reducing money supply raises the interest rates which make loans expensive. Higher interest rates lower the investments demand and other demand for goods due to expensive loans available in the market.
Therefore, the central bank uses the contractionary monetary policy to decrease the money supply.
Learn more:
1. Learn more about the role of money
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2. Learn more about the objective of the budget
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3. Learn more about the revenue and expenditure
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Answer details:
Grade: Senior School
Subject: Economics
Chapter: Money and banking
Keywords: what, monetary policy, involve, decreasing, money supply, money, money and banking, central bank, inflation, growth, cope up with inflation, controlling the money supply, stabilizing the economy.
