Question

What contractionary monetary policy actions may be used to help reduce inflation?

A. The money supply is reduced, so banks charge a lower interest rate on
loans, leading to higher borrowing and growth.
B. The money supply is reduced, so banks charge a higher interest rate
loans, leading to slower borrowing and growth.
C. The money supply is increased, so banks charge a lower interest rate on
loans, leading to slower borrowing and growth.
D. The money supply is increased, so banks charge a higher interest rate on
loans, leading to slower borrowing and growth.

Answer 1

The answer is B.

Step-by-step explanation:

To make thing more simple, the money supply is reduced, so banks charge a higher interest rate on loans, leading to slower borrowing and growth. Monetary policy involves controlling the supply of money, sometimes through interest rates. When the supply of money is reduced, central banks make borrowing money more difficult and less appealing by raising interest rates on a variety of loans.

Additionally, it is on USA test prep.

Answer 2

The answer is B.

Step-by-step explanation:

Contractionary monetary policy is a policy adopted by Central banks when the economy is heating up i.e when the economy is moving faster than it can withstand. So this is used to slow down the economy.

There is always a higher inflation and money supply is high when the economy is heating up.

So to contract or slow down the economy, the central banks increase the interest rate, this increase in interest rate discourages borrowing from households, businesses and even commercial banks and when there is a low demand for borrowed fund, money supply (total quantity of money in circulation) decreases.