Economics • Banking & FinanceHard
What does the 'Monetary Policy Committee (MPC)' in India do when it decides to adopt a 'contractionary monetary policy stance'?
A. It raises policy interest rates and reduces money supply to curb inflationary pressures in the economy✓ Correct Answer
B. It lowers reserve requirement ratios and injects liquidity into the banking system through open market bond purchases
C. It reduces the statutory liquidity ratio to encourage commercial banks to expand credit to housing sectors
D. It provides subsidized refinance facilities to agricultural development banks during harvest seasons
💡 Solution & Explanation
A contractionary monetary policy stance involves raising policy interest rates like the repo rate and restricting money supply growth to cool down aggregate demand and rein in inflation. Distractors describe expansionary measures such as lowering reserve ratios or injecting liquidity. The Monetary Policy Committee uses these tools to anchor inflation expectations around the target mandated by the government. Higher borrowing costs discourage excessive consumer spending and corporate credit expansion.
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