Question

Tight monetary policy theory dictates that when the economy is faced with inflation, the government should:______

Answer 1

Tight monetary policy theory dictates that when the economy is faced with inflation, the government should increase interest rates.

When a central bank attempts to keep inflation under control, tight monetary policy, also known as contractionary monetary policy, usually takes place. The economy may become overheated as a result of excessive consumer and business borrowing and spending, which might significantly increase the cost of products and services.

The tight monetary policy suggests the Central Bank (or monetary policy authority) is attempting to slow down the demand for money and slow the rate of economic expansion. This typically entails rising interest rates. Usually, the goal of tight monetary policy is to lower inflation. For instance, cutting back on money printing or selling long-term government bonds to the banking industry. The antithesis of quantitative easing would be this.

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