Suppose the federal reserve decides to decrease the money supply in order to lower inflation. in 3 or 4 sentences, explain if this is an expansionary or contractionary policy.

Contractionary monetary policy.

Explanation:

In order to reduce the money supply in an economy, the Federal reserve uses the contractionary monetary policy. There are certain monetary policy instruments that are used by the Federal reserve are as follows:

(a) Cash reserve ratio:

It is the ratio of deposits that commercial bank have to kept with federal reserve. For reducing the inflation, the federal reserve should increase the cash reserve ratio.

(b) Open market operations:

The open market operations is the buying and selling of government securities by the federal reserve. For reducing the inflation, the federal reserve should sell the government securities to the public.

(c) Discount rate:

For reducing the inflation, the fed should increase the repo rate.

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