Contractionary monetary policy

What is the main objective of contractionary monetary policy?

• To increase interest rates

• To lower employment rates

• To reduce the rate of monetary expansion and fight inflation

Which component of aggregated demand is directly affected by contractionary monetary policy?

• G (Government spending)

• I (Investment)

• X (Exports)

• M (Imports)

What is the target inflation rate set by the Argentinean bank?

• 2%

• 4%

• 3%

• 1%

How might contractionary monetary policy impact consumers in the short run?

• Increase their spending on long-term assets

• Reduce their spending on long-term assets like houses and cars

• • Have no effect on consumer behavior

What impact could contractionary monetary policy have on Argentina's export prices?

• • Make exports cheaper for foreign buyers

• Make exports more expensive for foreign buyers

• • Have no impact on export prices

What is a potential long-term benefit of successful contractionary monetary policy regarding government debt?

• • Improved credit quality of financial institutions' loan portfolios

• Increased debt servicing expenses

• Decreased ability to invest in public services

How does contractionary monetary policy impact consumers in the short run?

• Incentivizes saving

• Decreases confidence in the economy

• Increases spending on long-term assets

• Reduces interest expenses

What may hinder further economic growth in Argentina due to contractionary monetary policy?

• Decreased asset prices

• High-interest rates

• Increased business investment

What may be experienced by Argentina in the long run due to the implementation of contractionary monetary policy?

• Increased tax revenues

• Improved credit quality of financial institutions

• Budget deficit

• Higher minimum wages

In evaluating the overall effectiveness of Argentina's contractionary monetary policy, what can you allude about key challenges the economy faces?

• • Potential for rapid economic growth and increased consumer confidence

• • Risk of asset bubbles and speculative investments causing economic instability, because although theoretically this should not happen, it does because Argentina battles with hyperinflation nonetheless (53% hyperinflation in 2019) and thus 'investment shelters' are still in place where investors are likely to keep buying assets such as stocks, real estate and gold in order to shield themselves from hyperinflation, as assets are more tangible and valuable than cash alone.

• Lower risk of asset bubbles and speculative investments causing economic instability, because lower interest rates can make borrowing more expensive, potentially cooling off speculative investing in assets like real estate, gold or stock. An asset bubble would mean confidence in investing in such assets is high, increasing its' value, and then making investors speculate it will keep increasing so they keep buying, until the actual price is too high and the market 'crashes' as prices start falling and thus investors have to sell off these assets at lower prices. Avoiding this manages sustainable economic growth.