Contractionary and Expansionary Monetary Policies

Contractionary monetary policy: When the economic activity is likely to lead to an increase in inflation, the central bank increases interest rates, thereby reducing liquidity.

The policy is designed to cause the rate of growth of the money supply and the real economy to contract.

Expansionary monetary policy: when the economy is slowing and inflation and monetary trends are weakening, central banks may increase liquidity by cutting their target rate.