Question

Contractionary monetary policy occurs when: a. a central bank acts to decrease the money supply in an effort to control an economy that is expanding too quickly. b. Congress and the president decrease taxes in an effort to stimulate the economy. c. a central bank acts to increase government spending in an effort to stimulate the economy. d. Congress and the president increase taxes in an effort to control an economy that is expanding too quickly. e. a central bank acts to increase the money supply in an effort to stimulate the economy.

Answer 1

Answer: A a central bank acts to decrease the money supply in an effort to control an economy that is expanding too quickly

Explanation:

Contractionary monetary policy is a form of economic policy used to fight inflation which involves decreasing the money supply in order to increase the cost of borrowing which in turn decreases GDP and dampens inflation.

When the economy is under inflationary pressures, the central bank decreases the money supply by either increase in the discount rate or sale of government bonds or increase in the required reserve ratio or by carrying out all the changes simultaneously.