ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Contractionary monetary policy occurs when the Fed raises the discount rate. This makes it harder for commercial banks to borrow reserves from the Fed.

Detailed explanation-2: -A contractionary policy is a tool used to reduce government spending or the rate of monetary expansion by a central bank to combat rising inflation. The main contractionary policies employed by the United States include raising interest rates, increasing bank reserve requirements, and selling government securities.

Detailed explanation-3: -Contractionary Monetary Policy Graph Higher interest rates increase the cost of borrowing money, which discourages consumers from spending on some goods and services and reduces businesses’ investment in new equipment.

Detailed explanation-4: -In order to reduce the money supply, the central bank can opt to increase the cost of short-term debt by increasing the short-term interest rate. The increase in interest rates will also affect consumers and businesses in the economy as commercial banks will raise the interest rates they charge their clients.