The Federal Reserve would most likely adopt a contractionary monetary policy in which economic situation?
A. The country has a high inflation rate and rapid economic growth.
B. The country has a high unemployment rate and slow economic
growth.
C. The country has a low inflation rate and weak economic growth.
D. The country has a low unemployment rate and steady economic
growth.

A. The country has a high inflation rate and rapid economic growth.

Explanation:

A contractionary monetary policy aims at limiting the amount of money supply in the economy. Contractionary monetary policies discourage banks from lending out money to businesses and households. If firms and individuals have no easy access to credit, the level of investments and consumption declines, resulting in slower economic growth.

Contractionary monetary policies are also used to tame a high inflation rate. Inflation is the general increase in prices in the economy. It may arise due to a high economic growth rate. Because contractionary policies decrease the supply of money in the economy, less liquidity reduces the aggregate demand, thereby curbing increasing prices.