ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Contractionary monetary policy: This type of policy is used to decrease the amount of money circulating throughout the economy, typically by selling government bonds, raising interest rates, and increasing the reserve requirements for banks. The government uses this method when it wants to avoid inflation.

Detailed explanation-2: -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.

Detailed explanation-3: -Raise the reserve requirements Commercial banks are obliged to hold the minimum amount of reserves with the central bank and a bank’s vault. A rise in the required reserve amount would decrease the money supply in the economy.

Detailed explanation-4: -When the Federal Reserve increases the required reserve ratio as a part of a contractionary monetary policy, there is: A decrease in the money supply and an increase in the interest rate.

Detailed explanation-5: -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.