This reduces consumer expenditure through the household liquidity effect.
What is contractionary monetary policy?
- In order to combat inflation, a type of monetary policy known as a contractionary monetary policy seeks to slow down the rate of monetary expansion. An overheated economy, which can happen as a result of prolonged periods of economic expansion, is thought to be indicated by a spike in inflation.
- By reducing the quantity of active money circulating in the economy, inflation is intended to be reduced. Additionally, it tries to stifle any unwise capital investment and speculation that earlier expansionary policies could have sparked.
- To prevent inflation, contractionary monetary policy attempts to slow down or even stop the expansion of the economy. Growing interest rates and a shrinking money supply are the main ways it slows GDP.
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