ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -A contractionary policy is a monetary measure to reduce government spending or the rate of monetary expansion by a central bank. It is a macroeconomic tool used to combat rising inflation.

Detailed explanation-2: -Even so, interest rate hikes are known as the central bank’s one major tool to lower inflation, which it does by raising the cost of borrowing money to curb the demand for goods and services. Economists won’t know until later if the Fed’s moves were successful or not.

Detailed explanation-3: -The Federal Reserve uses contractionary monetary policy to curb inflation that accompanies an overheating economy.

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: -Therefore, the central bank is likely to implement a contractionary monetary policy. This is a common strategy to fight inflation. When the central bank implements a contractionary monetary policy, it increases the interest rate, it increases the reserve requirements, and it sells government securities.