The purpose of a contractionary monetary policy is to:

• A. increase aggregate demand by expanding credit availability
• B. lower unemployment by reducing interest rates
• C. reduce inflation by decreasing the money supply
• D. stimulate economic growth by increasing government spending

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the goal of contractionary monetary policy. It is primarily used to reduce inflation by decreasing the money supply in the economy.
2. Step 2: Recall that contractionary monetary policy typically involves actions such as increasing interest rates or selling government securities to reduce the amount of money circulating.
3. Step 3: Recognize that reducing the money supply leads to higher interest rates, which discourages borrowing and spending, thereby decreasing aggregate demand.
4. Step 4: Note that decreasing aggregate demand helps to control inflation by slowing down the economy and preventing prices from rising too quickly.
5. Step 5: Contrast contractionary monetary policy with expansionary policies, which aim to increase aggregate demand and stimulate growth, often by lowering interest rates or increasing the money supply.