What is Contractionary Monetary Policy and How Does It Operate?

 

CONTRACTIONARY MONETARY POLICY: WHAT IS IT?

The process through which a central bank employs different measures to reduce inflation and the overall level of economic activity is known as contractionary monetary policy. A mix of interest rate increases, increased reserve requirements for commercial banks, and quantitative tightening, often known as large-scale government bond sales, are the methods used by central banks to accomplish this (QT).

It may seem counterintuitive to desire to reduce economic activity, but doing so has unintended consequences like inflation, which is the overall increase in the cost of ordinary products and services used by people when an economy is growing faster than it can maintain.

As a result, central bankers use a variety of monetary instruments to purposefully reduce economic activity without causing the economy to collapse. Officials deliberately adjust financial circumstances, causing people and companies to think more carefully about their present and future spending patterns. This delicate balancing effort is often referred to as a “soft landing.”

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