Restrictive monetary policy is designed to curtail aggregate demand and to overcome________

1. Analyze the question Restrictive (contractionary) monetary policy reduces the money supply or raises interest rates so that spending in the economy falls. The question asks which problem this is meant to fix.

2. Explain the concept

• Restrictive monetary policy: the Central Bank of Nigeria (CBN) raises the Monetary Policy Rate (MPR) or the Cash Reserve Ratio (CRR), or sells securities. Credit becomes more expensive and scarcer, so aggregate demand falls.
• Inflationary gap: this occurs when aggregate demand is greater than the output the economy can produce at full employment. The excess demand pushes prices up.
• Deflation: a general fall in prices. It is cured by expansionary policy, not restrictive policy.
• Reflation: deliberately boosting demand to lift a depressed economy. It is the opposite of what restrictive policy does. (The option is spelled "reinflation" here, but it means the same thing.)
• Disinflation: a slowing of the inflation rate. It is an outcome of restrictive policy, not a problem that the policy overcomes.

3. Step-by-step solution

1. Restrictive policy aims to curtail aggregate demand.
2. Demand needs to be curtailed only when it is excessive.
3. Excessive demand above full-employment output is called an inflationary gap.
4. So the policy is designed to close the inflationary gap.
5. Check the other options: • A (Deflation) already has weak demand, so cutting demand further would make it worse. • B (Reinflation) needs more demand, not less. • C (Disinflation) is a result of the policy, not the problem being overcome. The question asks what the policy is meant to overcome, and that problem is the inflationary gap.

4. Answer The correct option is **D.

5. Exam tip Match the policy to the problem:

• Restrictive/contractionary policy → tackles inflation / inflationary gap
• Expansionary policy → tackles deflation / deflationary gap / recession

Whenever you see "curtail demand," think "too much demand," which means inflation.