Question

What kind of a process does the Central Bank's narrowing monetary policy implementation reveal?

Answer 1

When a central bank narrows downs its monetary policy, it essentially reveals us that the bank is aiming to decease the flow of money in the economy. When there is a high velocity of money, it translates to an increased consumer spending. In simple, the prices are inflated in the economy as a response to the increase in demand. When this inflation exceeds the target inflation rate of the central banks, they tend to step in bring back the inflation to targer by increasing interest rates, increasing fed rates and performing open market operations. In a nutshell, a contractionary monetary policy reveals us that the central bank is trying to curb inflation by reducing the money supply and growth rate of the economy.

Hope this helps. Do hit the thumbs up. Cheers!