ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Also known as tight monetary policy, contractionary policy decreases a nation’s money supply to curb rampant inflation and keep the economy in balance. A central bank will likely hike interest rates and try to slow the growth of money and prices.

Detailed explanation-2: -The Fed controls the supply of money by increasing or decreasing the monetary base. The monetary base is related to the size of the Fed’s balance sheet; specifically, it is currency in circulation plus the deposit balances that depository institutions hold with the Federal Reserve.

Detailed explanation-3: -When the Central Bank acts in a way that causes the money supply to increase while aggregate demand remains unchanged, it is: an expansionary monetary policy. If a Central Bank decides it needs to decrease both the aggregate demand and the money supply, then it will: follow tight monetary policy.

Detailed explanation-4: -The Federal Reserve increases the money supply when it is trying to encourage the economy to . Consumers are more willing to spend using credit when the money supply is higher because interest rates are . One major positive effect of increasing the money supply is in the unemployment rate.

Detailed explanation-5: -Monetary policy in the United States comprises the Federal Reserve’s actions and communications to promote maximum employment, stable prices, and moderate long-term interest rates–the economic goals the Congress has instructed the Federal Reserve to pursue.