ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -A contractionary monetary policy is a type of monetary policy that is intended to reduce the rate of monetary expansion to fight inflation. A rise in inflation is considered the primary indicator of an overheated economy, which can be the result of extended periods of economic growth.

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: -Contractionary monetary policy is now a more popular method of controlling inflation. The goal of a contractionary policy is to reduce the money supply within an economy by increasing interest rates. 5 This helps slow economic growth by making credit more expensive, which reduces consumer and business spending.

Detailed explanation-4: -With a 2-3% inflation target, when prices in an economy deviate the central bank can enact monetary policy to try and restore that target. If inflation heats up, raising interest rates or restricting the money supply are both contractionary monetary policies designed to lower inflation.

Detailed explanation-5: -When it needs to absorb money to reduce inflation, the central bank will sell government bonds on the open market, which increases the interest rate and discourages borrowing. Open market operations are the key means by which a central bank controls inflation, money supply, and prices.