Monetary contraction is the monitory policy which reduces the size of money supply in the economy. This policy is controlled by the central bank of the state and the main purpose of this policy is to reduce inflation in the economy. There are three major tools of the monetary policy through which monetary contraction is achieved including; monetary base, reserve requirements and discount window lending. If the state bank wants to implement contractionary monetary policy then it can reduce the monetary base, exert more control over banks and by increasing the interest rates.
