What effect will contractionary monetary policy tend to have?
A)It will tend to decrease the money supply and increase interest rates.
B)It will tend to decrease the money supply and lower interest rates.
C)It will tend to increase the money supply and lower interest rates.
D)It will tend to increase the money supply and increase interest rates.

Question

Quizplus · Accepted Answer

Contractionary monetary policy is implemented by the central bank to cool down the economy during a period of high inflation. This is typically done by increasing interest rates and decreasing the money supply (through measures such as selling government bonds and reducing the amount of reserves banks are required to hold). As a result, borrowing becomes more expensive, and consumers and businesses are less likely to take out loans or make investments. This slows down economic activity, which in turn helps to reduce inflationary pressure. Therefore, the correct answer is A) – contractionary monetary policy will tend to decrease the money supply and increase interest rates.

What Effect Will Contractionary Monetary Policy Tend to Have