ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Contractionary monetary policy causes a decrease in bond prices and an increase in interest rates. Higher interest rates lead to lower levels of capital investment. The higher interest rates make domestic bonds more attractive, so the demand for domestic bonds rises and the demand for foreign bonds falls.

Detailed explanation-2: -A contractionary policy often results in the tightening of credit through increased interest rates, increased unemployment, reduced business investment, and reduced consumer spending. There is commonly an overall reduction in the gross domestic product (GDP).

Detailed explanation-3: -A contractionary monetary policy, also called a tight monetary policy, reduces the quantity of money and credit below what it otherwise would have been and raises interest rates, seeking to hold down inflation.

Detailed explanation-4: -An unwanted side effect of a contractionary monetary policy is a rise in unemployment. The economic slowdown and lower production cause companies to hire fewer employees. Therefore, unemployment in the economy increases.