Which scenario indicates that a contractionary monetary policy is needed?

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A. Investment has been slowing.

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B. The money supply has increased recently.

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C. Interest rates are increasing.

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D. The economy is growing rapidly.

The correct answer is D: the economy is growing rapidly.

Explanation:

Too-fast growth of the economy leads to, so-called, economic bubble, which can cause inflation because the money supply increases and the interest rate reduces. In this case, it's necessary to increase interest rates and decrease the rate of the money supply, in order to fight inflation and decrease GDP. This objective can be achieved by using a contractionary monetary policy.

A contractionary monetary policy serves to stabilize the inflation level and the prices in the economy by increasing liquidity and creating a significative economic growth.

Answer: D. The economy is growing rapidly.

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