ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -What Are Tight and Loose Monetary Policy? Tight monetary policy is a central bank’s efforts to contract a growing economy by increasing interest rates, increasing the reserve requirement for banks, and selling U.S. Treasuries.

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: -The most simple example of tight monetary policy would involve increasing interest rates. Alternatively in theory, the Central Bank could try and reduce the money supply. For example, printing less money, or sell long dated government bonds to banking sector. This is very roughly the opposite of quantitative easing.

Detailed explanation-4: -A contractionary policy increases interest rates and limits the outstanding money supply to slow growth and decrease inflation, where the prices of goods and services in an economy rise and reduce the purchasing power of money.

Detailed explanation-5: -Tight monetary policy, or contractionary monetary policy, typically occurs when a central bank wants to keep inflation under control. If there has been too much spending and borrowing by consumers and businesses, the economy can become overheated and that could considerably raise the price level of goods and services.