Reference no: EM131325761

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Contractionary monetary policy is a form of economic policy used to fight inflation which involves decreasing the money supply in order to increase the cost of borrowing which in turn decreases GDP and dampens. It is a type of policy or macroeconomic tool designed to combat rising in inflation or other economic distortions created by central bank or government interventions. When we look at Expansionary policy, we see that the macroeconomic policy seeks to expand the money supply to encourage economic growth or combat inflationary price increases. Now we need to look into the forms of expansionary policy. The first policy would be fiscal policy. This is when it comes from tax cuts, transfer payments, rebates and increase in government spending. The last form is known as monetary policy. This is when it is enacted by central banks and comes about through open market operations, reserve requirements and interest rates. When we look at the expansionary policy, we see that it should boost economic growth domestically. But, it also decreases net interest margins for the Canadian bank. It will squeeze the bank profits. Both increase spending which means this would generate more money for business, and even more taxes for government.