ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -However, one of the prime drawbacks of tightening the money supply in the economy is rising unemployment. It increases due to a decline in the consumption and production of goods and services.

Detailed explanation-2: -Tight monetary policy aims to slow down an overheated economy by increasing interest rates. Conversely, loose monetary policy aims to stimulate an economy by lowering interest rates.

Detailed explanation-3: -A contractionary policy attempts to slow the economy by reducing the money supply and fending off inflation. An expansionary policy is an effort that central banks use to stimulate an economy by boosting demand through monetary and fiscal stimulus.

Detailed explanation-4: -Monetary policy affects aggregate demand and inflation through a variety of channels. Adverse shocks, such as an oil price increase, can lead to higher unemployment and higher inflation. Many governments have given responsibility for monetary policy-often described as inflation targeting-to central banks.

Detailed explanation-5: -Central banks conduct monetary policy by adjusting the supply of money, usually through buying or selling securities in the open market. Open market operations affect short-term interest rates, which in turn influence longer-term rates and economic activity.