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.

Detailed explanation-2: -While monetary policy has the tools to subdue inflation, fiscal policy can put the economy on a sounder long-term footing through investment in infrastructure, health care, and education; fair distribution of incomes and opportunities through an equitable tax and transfer system; and provision of basic public services.

Detailed explanation-3: -Contractionary Policy vs. 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: -Contractionary and expansionary policies involve modification of the level of money supply in an economy. An expansionary policy increases the supply of money in an economy. On the other hand, a contractionary policy decreases the supply of a country’s currency.

Detailed explanation-5: -Note that the goal of contractionary monetary policy is to decrease the rate of demand for goods and services, not to stop it. So, higher interest rates through contractionary policy can be used to dampen inflation and move the economy back to the price stability component of the dual mandate.