Contractionary Monetary Policy
Definition
Contractionary monetary policy is an economic strategy used by central banks to slow down inflation or control excessive economic growth. It involves decreasing the money supply and raising interest rates to discourage borrowing and spending.
Analogy
Think of contractionary monetary policy as putting brakes on a car that's going too fast. By reducing the amount of money in circulation and making borrowing more expensive, it helps slow down the economy and prevent inflation from getting out of control.
Related terms
Tight Monetary Policy: Another term for contractionary monetary policy, emphasizing the restrictive measures taken to rein in economic growth.
Inflation: The general increase in prices over time. Contractionary monetary policy aims to combat inflation by reducing spending and curbing excessive economic growth.
Reserve Requirements: The amount of funds that banks are required to hold as a percentage of their deposits. Adjusting reserve requirements is one tool used in contractionary monetary policy.
"Contractionary Monetary Policy" appears in:
Study guides (1)
Practice Questions (7)
Which of the following is an example of contractionary monetary policy?
What happens when the Federal Reserve sells government bonds as part of contractionary monetary policy?
What's the effect of contractionary monetary policy on interest rates?
What's the purpose of contractionary monetary policy?
What is the likely short-term effect of contractionary monetary policy on the economy?
How does the central bank implement contractionary monetary policy?
What is the likely short-term effect of contractionary monetary policy on the money supply and the interest rate?
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