Final answer:
A monetary contraction occurs when the central bank decreases the supply of money and credit in the economy, leading to an increase in interest rates. If a central bank becomes more credible and announces a monetary contraction in advance, the money supply will decrease.
Step-by-step explanation:
A monetary contraction occurs when the central bank decreases the supply of money and credit in the economy, which leads to an increase in interest rates. This is done to control inflation and reduce aggregate demand.
If a country's central bank becomes more credible and announces a monetary contraction in advance, it means that the central bank is more trustworthy in its commitment to reducing the money supply. As a result, people will have more confidence that inflation will be controlled, which can lead to a decrease in inflation expectations.
The correct answer is C) The money supply will decrease. When the central bank announces a monetary contraction, it is signaling its intention to reduce the money supply, which will have an impact on interest rates and inflation.