One popular method of controlling inflation is through a contractionary monetary policy in india its carried out by monetary policy committee headed by the rbi governor the goal of a contractionary monetary policy is to reduce the money supply within an economy by decreasing bond prices and increasing interest rates.
Monetary policy also has an important influence on inflation when the federal funds rate is reduced, the resulting stronger demand for goods and services tends to push wages and other costs higher, reflecting the greater demand for workers and materials that are necessary for production. The effect of monetary policy on the current and financial accounts is not so clear because the price and income effects move in opposite directions for example, the price effect of easy money on the current account tends to strengthen it, while the income effect tends to weaken the current account.
The contractionary monetary policy is the opposite of expansionary policy and a central bank tries to slow down the money supply to curb inflation impact of fiscal and monetary policies on economy fiscal and monetary policies are powerful tools that the government and concerned monetary authorities use to influence the economy based on reaction to certain issues and prediction of where the economy is moving. Monetary policy, established by the federal government, affects unemployment by setting inflation rates and influencing demand for and production of goods and services additionally, having stable prices and high demand for products encourages firms to hire workers, which reduces rates of unemployment.
In short, central banks manipulate interest rates to either increase or decrease the present demand for goods and services, the levels of economic productivity, the impact of the banking money multiplier and inflation however, many of the impacts of monetary policy are delayed and difficult to evaluate.
The federal reserve bank, in consultation with congress and the executive branch, makes monetary policy for the us the federal reserve (fed) is the nation's central bank, and it has the ability to control how much money circulates and the costs of borrowing money, known as interest. Because changes in interest rates influence economic activity and inflation with a substantial lag, the federal open market committee (fomc) sets monetary policy with an eye to its effects on the outlook for the economy.