Tighter monetary policy raises interest rates to curb economic activity

Steps:

• Tighter monetary policy, or contractionary policy, aims to reduce inflation and slow growth by limiting money availability.
• Central banks implement this by selling government securities or raising reserve requirements.
• This decreases the money supply, making borrowing costlier.
• Higher borrowing costs manifest as increased interest rates.

Why B is correct:

• By definition, contractionary monetary policy increases interest rates to discourage borrowing and spending, as per the central bank's transmission mechanism.

Why the others are wrong:

• A: Budget surplus relates to fiscal policy, not monetary tools controlled by the central bank.
• C: Tighter policy decreases, not increases, the money supply to restrict liquidity.
• D: Rates of taxation are a fiscal policy instrument, adjusted by government budgets, not monetary authorities.

Final answer: B