Answer to Question #47668 in Macroeconomics for yuvi singh

Question

an economy is experiencing demand pull inflation. its central bank is of the opinion that the economy is growing too rapidly and has decided to take action. outline the action it would take and describe with aid of diagram how it would help to slow down the overheated economy

what decision made by central bank. the action by bank ,money supply interest rate movement and the money multiplier.

Answer 1

Contractionary monetary policy is a type of policy that is used as a macroeconomic tool by the country's central bank or finance ministry to slow down an economy. Contractionary policies are enacted by a government to reduce the money supply and ultimately the spending in a country.
This is done primarily through:
1. Increasing interest rates
2. Increasing reserve requirements
3. Reducing the money supply, directly or indirectly
This tool is used during high-growth periods of the business cycle, but does not have an immediate effect.
So, in our case this policy will be used. The central bank will increase interest rate, the other banks will increase interest rate for loans and deposits, money supply and money multiplier will decrease, causing decrease of total business activity.