Decreasing the money supply involves which type of economic policy?
I think it is Monetary policy.
Yes, you are right, but fiscal policy also has the effect of adjusting the money supply, by directly adding to it (through government spending) or taking it away in taxes. Monetary policsy affects the money supply in less drastic ways.
Actually, this is referred to as "contractionary" Monetary Policy. This happens when the central bank sells bonds in the open market to remove money from circulation.
Even though fiscal policy takes money out of the hands of consumers through taxes, or increases it via spending, it does not take money out of circulation. It merely puts it into or out of the governments budget.
You are correct! Decreasing the money supply is indeed a component of monetary policy. Monetary policy refers to the actions and decisions taken by a central bank, such as the Federal Reserve in the United States, to regulate the supply of money and credit in the economy.
To achieve a decrease in the money supply, central banks typically engage in contractionary monetary policy. There are a few tools that central banks use to implement this policy:
1. Open Market Operations: The central bank can sell government bonds or securities to commercial banks and other financial institutions. This reduces the amount of money available in the banking system, effectively decreasing the money supply.
2. Reserve Requirements: Central banks can increase the reserve requirements for commercial banks. By raising the amount of money that banks are required to hold in reserves, less money is available for lending in the economy, leading to a decrease in the money supply.
3. Interest Rate Adjustments: Central banks can raise interest rates on loans, making borrowing more expensive for individuals and businesses. This increase in borrowing costs can discourage spending and borrowing, which can lead to a decrease in the money supply.
By using these tools, central banks aim to manage inflation, stabilize prices, and promote economic stability.