“It is always claimed by the commercial banks in the economy
that their “Net-Worth” fall sharply when Central bank adopt the
contraction monetary policy in the periods of high inflation in the
economy. What do you think is this right or wrong? Give comments in its
favor or against.”
In my point of view this statement is right.
Contractionary monetary policy is monetary policy that seeks to reduce
the size of the money supply.
Net worth is the total assets minus total outside liabilities of bank.
when the central bank is "tightening", it slows the process of private
bank issue by selling securities on the open market and pulling money
(that could be loaned) out of the private banking sector. By increasing
the supply of bonds, this lowers their prices and raises interest rates
at the same time that the money supply is reduced.
so when Central bank adopt the contraction monetary policy in the
periods of high inflation in the economy, the prices are lowers and
interest rates are increase Due to it net worth fall or decrease.