What is the meaning of contractionary monetary policy?
Contractionary policy is a monetary measure referring either to a reduction in government spending—particularly deficit spending—or a reduction in the rate of monetary expansion by a central bank.
What is the effect of contractionary monetary policy?
Why does contractionary monetary policy cause interest rates to rise? Contractionary policy reduces the amount of loanable funds in the economy. As with all goods, greater scarcity leads a greater price, so the interest rate, or the price of borrowing money, rises.
What is expansionary and contractionary monetary policy?
Broadly speaking, monetary policy is either expansionary or contractionary. An expansionary policy aims to increase spending by businesses and consumers by making it cheaper to borrow. A contractionary policy, on the other hand, forces spending lower by making it more expensive to borrow money.
What are the results of a contractionary monetary policy?
Contractionary monetary policy decreases the money supply in an economy. The decrease in the money supply is mirrored by an equal decrease in the nominal output, otherwise known as Gross Domestic Product (GDP). In addition, the decrease in the money supply will lead to a decrease in consumer spending.
How does contractionary monetary policy affect interest rates?
(b) In contractionary monetary policy, the central bank causes the supply of money and credit in the economy to decrease, which raises the interest rate, discouraging borrowing for investment and consumption, and shifting aggregate demand left.
What are the effects of contractionary monetary policy?
Which of the following is a result of contractionary monetary policy?
Which of the following is a result of contractionary monetary policy? Notes: In the contractionary monetary policy, the money supply in the economy decreases. It leads to increase in the interest rates.