Question

How does the Central Bank implement its contractionary money?

Answer 1

Central bank implements it's Contractionay monetary policy by using monetary policy tools which are as follows-

1 discount rate - this is the rate of interest which the central bank charges from commercial banks for short run loans. So it increases discount rates as then commercial bnks further give loans at higher rates .

Higher rates discourages consumers and businesses

2. Reserve requirements - reserve that should be hold by commercial banks . So to implement contractions ,central bank with increase this reserve ratios so that less fund be available with banks .

3. Open market operations - central bank sells the treasury bills of government in the market to soak liquidity in the economy.