Question

a.

a. What does a contractionary monetary policy​ involves?

b. Who is responsible to implement monetary policies in the​ US?

c. When would the central bank of a country implement this type of​ policy? Explain.

d. Using a graph explain the impact of this contractionary policy on the economy specifically​ - real​ GDP, unemployment and rate of inflation.

You can draw the graph on a​ paper, label it as MONETARYPOLICY

Answer 1

a) Inflation is a result of over heating economy, contractionary monitary policy is used to tackle inflation, this policy is implemented by decreasing the money supply, limiting liquidity by increasing interest rates, Selling government bonds to the banks which reduces their cash and reduces the available money to lend.

b) The Federal Reserve System(Fed) is responsible for implementing the monetary policy in the United States. Fed is the central banking system of US.

c) The Central bank of any country implements contractionary monetary policy when the country is facing a problem of inflation the central bank reduce the money supply which leads to an increased cost of borrowings casuing the GDP to shrink and decreases the inflation.

d) As seen in the above grapgh, the GDP shrinks fromm 500 to 400, Price decreases from 38 to 25 and AD curve falls leading to increasing Unemployement.