Contractionary policy

How should the government change its Monetary and Fiscal Policy during an inflation?

Expert Solution

Contractionary Monetary Policy

This is a type of monetary policy used by the central bank of a country to reduce monetary infaltion in order to fight inflation.

The contractionary monetary policy tools include:

The central bank increases the short-term interest rates to increase the cost of borrowing and increase savings.
The central bank raises the reserve requirements for commercial banks in order to reduce the money supply in the economy.
The central bank expands its open market operations by selling large amounts of government securities in order to reduce money circulation in the economy.

Contractionary Fiscal Policy

This is a form of fiscal policy where the government increases taxes and cuts on its expenditure to reduce aggregate demand. Consequently reducing the money supply in the economy.

Contractionary policy is a form of policy implemented by the policy makers to constrain aggregate spending in an economy.

Joes answered 3 years ago

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