ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Tight monetary policy is an action undertaken by a central bank such as the Federal Reserve to slow down overheated economic growth. Central banks engage in tight monetary policy when an economy is accelerating too quickly or inflation-overall prices-is rising too fast.

Detailed explanation-2: -The FOMC changes monetary policy primarily by raising or lowering its target for the federal funds rate, the interest rate for overnight borrowing between banks. Lowering the target rate represents an “easing” of monetary policy, while increasing the target rate is a “tightening” of policy.

Detailed explanation-3: -A central bank, such as the Federal Reserve in the U.S., will use expansionary monetary policy to strengthen an economy.

Detailed explanation-4: -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-5: -If the Fed, for example, buys or borrows Treasury bills from commercial banks, the central bank will add cash to the accounts, called reserves, that banks are required keep with it. That expands the money supply.