ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -A contractionary policy is a monetary measure to reduce government spending or the rate of monetary expansion by a central bank. It is a macroeconomic tool used to combat rising inflation.

Detailed explanation-2: -If it wants to reduce the amount of money in the economy, it can increase the reserve requirement. This means that banks have less money to lend out and will thus be pickier about issuing loans.

Detailed explanation-3: -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.

Detailed explanation-4: -The policy reduces the money supply in the economy to prevent excessive speculation and unsustainable capital investment. A contractionary monetary policy is generally undertaken by a central bank or a similar regulatory authority.

Detailed explanation-5: -Contractionary monetary policy is when a central bank uses its monetary policy tools to fight inflation. It’s how the bank slows economic growth. Inflation is a sign of an overheated economy. It’s also called a restrictive monetary policy because it restricts liquidity.