Answer to Question #247431 in Macroeconomics for Nina

Question

If reserve bank wants to pursue a contract on any monetary policy, the bank should

Answer 1

The bank should conduct various measures such as control the interest rate, reserve requirements, and control of open market operations. Contracting the monetary policy means effects aimed at reducing the money supply in the economy.

The reserve bank will increase the reserve ratio so that the amount available for credit is minimized thus reducing the amount of money in circulation in the economy. Basically the increase in the reserve ratio will make the funds available less and thus increase demand which will lead to increase in interest rate on loans pushing borrowers away from borrowing and thus contract monetary policy.

The reserve bank can issue bonds at the open market which will imply that institutions and interested people will buy them making the bank to receive the funds within the economy in exchange of bond agreements thus reducing the amount of money in the supply within the economy.