Which monetary policy typically seeks to lower inflation?

Which monetary policy typically seeks to lower inflation?

• A. Expansionary monetary policy
• B. Contractionary monetary policy
• C. Fiscal policy
• D. Supply-side policy

Answer: (B)

Contractionary monetary policy is used primarily to lower inflation. This policy involves increasing interest rates and decreasing the supply of money in the economy. By raising interest rates, borrowing becomes more expensive, which typically reduces consumer spending and business investment. As spending declines, the demand for goods and services decreases, helping to cool off an overheating economy and reduce inflationary pressures. This approach contrasts with expansionary monetary policy, which aims to increase the money supply and lower interest rates to stimulate economic activity, potentially leading to higher inflation if used excessively. Fiscal policy, which involves government spending and taxation decisions, does not directly equate to adjusting interest rates or the money supply, and supply-side policy focuses more on boosting production capacity and efficiency in the economy rather than directly addressing inflation.

Contractionary monetary policy is used primarily to lower inflation. This policy involves increasing interest rates and decreasing the supply of money in the economy. By raising interest rates, borrowing becomes more expensive, which typically reduces consumer spending and business investment. As spending declines, the demand for goods and services decreases, helping to cool off an overheating economy and reduce inflationary pressures.

This approach contrasts with expansionary monetary policy, which aims to increase the money supply and lower interest rates to stimulate economic activity, potentially leading to higher inflation if used excessively. Fiscal policy, which involves government spending and taxation decisions, does not directly equate to adjusting interest rates or the money supply, and supply-side policy focuses more on boosting production capacity and efficiency in the economy rather than directly addressing inflation.