What is indicated by a contractionary monetary policy stance?

A contractionary monetary policy is implemented by a central bank to reduce inflation and slow down an overheating economy by decreasing the money supply. One of the primary tools used in this policy is the selling of government securities in the open market. When the central bank sells these securities, it effectively removes cash from the banking system because buyers pay for the securities, which leads to a decrease in the reserves available in banks.

This reduction in bank reserves means that banks can lend out less money, which ultimately restricts the overall money supply in the economy. As a result, higher interest rates can result from this lowered liquidity, further discouraging borrowing and spending.

The other options indicate actions that are contrary to a contractionary stance. Decreasing the cash rate typically encourages borrowing and spending, while increasing government spending would inject more money into the economy. Increasing the money supply directly opposes the goal of a contractionary policy, as it aims to slow economic activity and counter inflation.