A contractionary monetary policy is used to control__________

1. Analyze the question The question asks which economic problem a contractionary monetary policy is meant to control.

2. Explain the concept Monetary policy is how the Central Bank of Nigeria (CBN) manages the money supply and interest rates.

• Contractionary (tight) monetary policy reduces the money supply and makes borrowing more expensive. Tools include: • Raising the Monetary Policy Rate (MPR) • Raising the Cash Reserve Ratio (CRR) • Selling government securities (open market operations) • Raising the liquidity ratio
• Expansionary (easy) monetary policy does the opposite. It increases the money supply and lowers interest rates.

3. Step-by-step solution

• Inflation is a persistent rise in the general price level, usually caused by too much money chasing too few goods.
• Contractionary policy reduces the money in circulation, so people and businesses borrow and spend less.
• Lower total spending reduces demand, which eases upward pressure on prices.

Now check each option:

• A. Deflation: Falling prices. Contractionary policy would make this worse. Expansionary policy is the cure.
• B. Inflation: Rising prices. Contractionary policy is the right remedy.
• C. Recession: Falling output and rising unemployment. It is treated with expansionary policy, and tightening would deepen it.
• D. Balance of Payment deficit: This is mainly handled through trade, exchange rate, and import policies. Tight money can help indirectly, but it is not the primary purpose.

4. Answer The correct option is B. Inflation.

5. Exam tip Remember: "Contract = Cool down." Contractionary policy cools an overheated economy (inflation). Expansionary policy warms up a sluggish one (deflation or recession).