Which is contractionary monetary policy?

Question

BlackTom AI · Accepted Answer

Contractionary monetary policy raises the central bank’s policy interest rate (or otherwise tightens liquidity), so "raising interest rates" is the correct choice.

1. Relevant knowledge points and concepts
- Monetary policy is conducted by the central bank and alters interest rates and the money supply to influence aggregate demand, inflation, and output.
- Contractionary (tight) monetary policy aims to slow economic activity and reduce inflation by making borrowing more expensive and reducing spending.
- Fiscal policy (government spending or taxes) is separate from monetary policy.

2. Step-by-step reasoning process
- Central bank raises its policy rate (e.g., federal funds rate, discount rate).
- Higher policy rates feed through to market interest rates for loans, mortgages, and corporate borrowing.
- As borrowing costs rise, households cut consumption (especially durable goods and housing) and firms delay or cancel investment projects.
- Lower consumption and investment reduce aggregate demand (AD).
- With weaker AD, upward pressure on prices eases, slowing inflation and cooling an overheating economy.

3. Intermediate steps / transmission mechanism (explicit)
- Policy rate ↑ → commercial bank lending rates ↑
- Lending rates ↑ → quantity of loans demanded ↓
- Loans demanded ↓ → consumption and investment ↓
- Consumption & investment ↓ → AD curve shifts left → GDP growth ↓ and inflation pressure ↓

4. Why the correct answer is correct
- Raising interest rates is a standard contractionary monetary tool: it tightens financial conditions and reduces money creation through lower loan demand, thereby slowing economic activity and inflation.

5. Why the other options are incorrect
- Raising government spending: this is expansionary fiscal policy; it increases AD, the opposite effect.
- Raising taxes: this is contractionary fiscal policy, not a monetary policy instrument; it's fiscal, not monetary.
- Raising the money supply: that is expansionary monetary policy (lowers interest rates), opposite of contractionary.

6. Conclusion
- Therefore, the contractionary monetary policy option is raising interest rates, which matches the provided answer.

Which is contractionary monetary policy?单项选择题

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