What are 5 examples of contractionary monetary?

A contractionary monetary policy utilizes the following variations of these tools:

  • Increase the short-term interest rate (discount rate)
  • Raise the reserve requirements.
  • Expand open market operations (sell securities)
  • Reduced inflation.
  • Slow down economic growth.
  • Increased unemployment.

What curve does contractionary monetary policy shift?

A contractionary monetary policy will shift the supply of loanable funds to the left from the original supply curve (S0) to the new supply (S2), and raise the interest rate from 8% to 10%.

How does contractionary monetary policy affect inflation?

Today, contractionary monetary policy is a more popular method of controlling inflation. The goal of a contractionary policy is to reduce the money supply within an economy by increasing interest rates. 5 This helps slow economic growth by making credit more expensive, which reduces consumer and business spending.

What are the benefits of contractionary monetary policy?

Contractionary monetary policy helps the economy during high inflationary rate. If applied, it reduces the size of money supply in the economy, thereby raising the interest rates. This pushes the demand and the cost of production to desirable levels. This reduces the rate of inflation.

How does contractionary monetary policy affect exchange rates?

A contractionary monetary policy, by driving up domestic interest rates, would cause the currency to appreciate. The higher value of the currency in foreign exchange markets would reduce exports, since from the perspective of foreign buyers, they are now more expensive.

Is LM curve contractionary monetary policy?

Contractionary monetary policy moves the LM curve to the left, lowering income and raising interest rates. Expansionary fiscal policy moves the IS curve to the right, raising both income and interest rates. Contractionary fiscal policy moves the IS curve to the left, lowering both income and interest rates.

What are the risks of contractionary monetary policy?

Contractionary monetary policy throws on the brakes by reducing the money supply. The U.S. Federal Reserve makes the call on when to do this. It can slow down the economy, for example, by increasing the interest rate at which it loans money to banks, or at which banks can borrow from each other.