BACHELOR OF BUSINESS ADMINISTRATION

Detailed explanation-1: -The inflation level is the main target of a contractionary monetary policy. By reducing the money supply in the economy, policymakers are looking to reduce inflation and stabilize the prices in the economy.

Detailed explanation-2: -When GDP in a nation is growing too fast, causing inflation to increase beyond a desirable rate of 2%, central banks will implement a contractionary monetary policy. The Federal Reserve, or any central bank, has three primary tools to reduce the money supply.

Detailed explanation-3: -To combat inflation, the government could use contractionary fiscal policy. In this case, it might raise taxes and decrease government spending in an attempt reduce the total level of spending.

Detailed explanation-4: -Contractionary policies are macroeconomic tools designed to combat economic distortions caused by an overheating economy. Contractionary policies aim to reduce the rates of monetary expansion by putting some limits on the flow of money in the economy.

Detailed explanation-5: -Note that the goal of contractionary monetary policy is to decrease the rate of demand for goods and services, not to stop it. So, higher interest rates through contractionary policy can be used to dampen inflation and move the economy back to the price stability component of the dual mandate.