In monetary policy, which action is typically used to deflate the economy by encouraging saving and reducing the money supply?

In monetary policy, which action is typically used to deflate the economy by encouraging saving and reducing the money supply?

• A. Decrease interest rates
• B. Increase money supply
• C. Print more money
• D. Increase interest rates

Answer: (D)

Raising interest rates tightens monetary policy. When policy rates go up, borrowing becomes more expensive, which slows consumer spending and business investment. At the same time, higher returns on deposits make saving more attractive, encouraging households to save rather than spend. With borrowing and spending cooled, credit creation slows and the money supply grows more slowly, helping deflate activity and ease inflationary pressures. The other options would tend to expand liquidity and stimulate the economy rather than deflate it.

Raising interest rates tightens monetary policy. When policy rates go up, borrowing becomes more expensive, which slows consumer spending and business investment. At the same time, higher returns on deposits make saving more attractive, encouraging households to save rather than spend. With borrowing and spending cooled, credit creation slows and the money supply grows more slowly, helping deflate activity and ease inflationary pressures. The other options would tend to expand liquidity and stimulate the economy rather than deflate it.