Monetary policy refers to the actions taken by a central bank to manage the supply and demand of money and credit in an economy. There are two types of monetary policies: contractionary and expansionary.

Contractionary Monetary Policy:

Contractionary monetary policy is used to slow down economic growth and control inflation. This policy is implemented by the central bank by decreasing the money supply in the economy. The following are the tools used in contractionary monetary policy:

1. Increasing interest rates: The central bank increases the interest rates, which makes borrowing more expensive. This reduces the demand for credit, which decreases the money supply.

2. Selling government securities: The central bank sells government securities to commercial banks, which reduces the amount of money that banks can lend.

3. Increasing reserve requirements: The central bank increases the reserve requirements for commercial banks. This reduces the amount of money that banks can lend.

Expansionary Monetary Policy:

Expansionary monetary policy is used to stimulate economic growth and increase employment. This policy is implemented by the central bank by increasing the money supply in the economy. The following are the tools used in expansionary monetary policy:

1. Decreasing interest rates: The central bank decreases the interest rates, which makes borrowing cheaper. This increases the demand for credit, which increases the money supply.

2. Buying government securities: The central bank buys government securities from commercial banks, which increases the amount of money that banks can lend.

3. Decreasing reserve requirements: The central bank decreases the reserve requirements for commercial banks. This increases the amount of money that banks can lend.

In summary, contractionary monetary policy is used to slow down economic growth and control inflation, while expansionary monetary policy is used to stimulate economic growth and increase employment.