A monetary policy that reduces the amount of money and loans in the economy is a contractionary monetary policy or a “ti

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A monetary policy that reduces the amount of money and loans in
the economy is a contractionary monetary policy or a “tight”
monetary policy. A monetary policy that expands the quantity of
money and loans is known as an expansionary monetary policy or a
“loose” monetary policy. Tight or contractionary monetary policy
that leads to higher interest rates and a reduced quantity of
loanable funds will reduce two components of aggregate demand.
Conversely, a loose or expansionary monetary policy that leads to
lower interest rates and a higher quantity of loanable funds will
tend to increase business investment and consumer borrowing for
big-ticket items. If loose monetary policy seeking to end a
recession goes too far, it may push aggregate demand so far to the
right that it triggers inflation. If tight monetary policy seeking
to reduce inflation goes too far, it may push aggregate demand so
far to the left that a recession begins.