Question

How do tight and loose monetary policy affect interest rates?

Short answer

It's a profitable policy that encourages moneymaking expansion while also combating inflationary price increases by growing the money supply.

Step-by-step solution

Introduction

Monetary Policies: Expansionary and Contractionary Monetary Policies- Any monetary policy that lowers interest rates and increases borrowing is referred to as loose or expansionary monetary policy. Tight monetary policy or contractionary monetary policy, on the other hand, is defined as any monetary policy that raises interest rates and hence reduces borrowing in an economy. Such policies are critical in the fight against inflation.

Explanation 

Contractionary policy, often known as tight monetary policy, limits the amount of money available for lending in the economy. As a result, interest rates in the economy will rise. It's essentially an inflation-fighting policy. Inflation is stifled by reducing the cash supply through this policy in order to raise the cost of borrowing. Expansionary policy, often known as loose monetary policy, increases the availability of loanable capital in the economy. As a result of interest rates, an economy is called. It's essentially a policy aimed at promoting economic growth and combating inflation by increasing the money supply.