ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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-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: -The Federal Reserve uses three main contractionary monetary tools: increasing interest rates, increasing banks’ reserve requirement, and selling government securities.

Detailed explanation-4: -Contractionary monetary policy can lead to increased unemployment and decreased borrowing and spending by consumers and businesses, which can eventually lead to an economic recession if too aggressively applied.

Detailed explanation-5: -Increase the short-term interest rate (discount rate) Raise the reserve requirements. Expand open market operations (sell securities) Reduced inflation. Slow down economic growth. Increased unemployment. 05-Dec-2022