Question

Decreasing the money supply involves which type of economic policy?

I think it is Monetary policy.

Answer 1

Yes, you are right, but fiscal policy also has the effect of adjusting the money supply, by directly adding to it (through government spending) or taking it away in taxes. Monetary policsy affects the money supply in less drastic ways.

Answer 2

Actually, this is referred to as "contractionary" Monetary Policy. This happens when the central bank sells bonds in the open market to remove money from circulation.

Even though fiscal policy takes money out of the hands of consumers through taxes, or increases it via spending, it does not take money out of circulation. It merely puts it into or out of the governments budget.