Question

What are the results of contractionary monetary policy, which intends to slow down the economy, and what are not

Answer 1

The following are results of contractionary monetary policy:

• raises interest rate
• increases investment spending
• reduces money supply

The following are not results of contractionary monetary policy:

• increases real GDP in the short run
• increases consumer spending
• increases aggregate demand in the short run

What is a contractionary monetary policy?

Monetary policy are policies taken by the central bank of a country to shift aggregate demand and / or change the money supply in the economy.

There are two types of monetary policy :

Expansionary monetary policy : these are polices taken in order to increase money supply. When money supply increases, aggregate demand increases. Reducing interest rate and open market purchase are ways of carrying out expansionary monetary policy

Contractionary monetary policy : these are policies taken to reduce money supply. When money supply decreases, aggregate demand falls. Increasing interest rate and open market sales are ways of carrying out contractionary monetary policy

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