Contractionary Policy

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Definition of 'Contractionary Policy'

Contractionary policy is a monetary policy that is used to reduce the money supply and increase interest rates. This can be done by selling government bonds, raising the reserve requirement, or increasing the discount rate. Contractionary policy is used to cool down an overheated economy and reduce inflation.

Contractionary policy works by making it more expensive for businesses and consumers to borrow money. This reduces investment and spending, which slows down economic growth. It also increases the value of the dollar, which makes it more difficult for American goods and services to compete in the global market.

Contractionary policy is often used in response to high inflation. When the price of goods and services is rising rapidly, contractionary policy can help to slow down the economy and bring inflation under control. However, contractionary policy can also have negative consequences, such as increasing unemployment and reducing economic growth.

Contractionary policy is a powerful tool that can be used to manage the economy. However, it is important to use it carefully and only when necessary. If contractionary policy is used too aggressively, it can cause a recession.

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