In macroeconomics, the primary purpose of a contractionary monetary policy is to:

• A. Increase aggregate demand to reduce unemployment in a recession
• B. Decrease aggregate demand to reduce inflationary pressure
• C. Lower interest rates to stimulate borrowing and investment
• D. Increase the money supply to boost consumption and real GDP

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the goal of contractionary monetary policy. It is typically used to reduce inflation by slowing down economic activity.
2. Step 2: Recall that contractionary monetary policy involves actions such as increasing interest rates or reducing the money supply.
3. Step 3: Recognize that increasing interest rates makes borrowing more expensive, which tends to reduce consumption and investment.
4. Step 4: Understand that reducing consumption and investment leads to a decrease in aggregate demand, which helps to lower inflationary pressures.
5. Step 5: Conclude that the primary purpose of contractionary monetary policy is to decrease aggregate demand to reduce inflation, not to increase aggregate demand or stimulate borrowing.