Contractionary monetary policy is the monetary policy that reduces aggregate demand.

• A. Expansionary monetary policy
• B. Productivity policy
• C. Fiscal policy
• D. Contractionary monetary policy

Answer: (D)

The main idea tested is how tightening monetary policy affects overall spending in the economy. Contractionary monetary policy tightens the money supply and typically raises interest rates. Higher borrowing costs discourage households from taking on loans for big purchases and lead firms to postpone or scale back investment. With spending and investment down, aggregate demand falls, so the AD curve shifts left. This helps to reduce inflationary pressures, though it can slow economic growth in the short term.

This differs from expansionary monetary policy, which lowers interest rates to boost demand. Other options either refer to different tools (fiscal policy uses government spending and taxes) or to policies aimed at improving efficiency (productivity policy), rather than monetary measures. So the statement correctly identifies the idea: contractionary monetary policy reduces aggregate demand.