Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Increased consumer spending due to lower interest rates
B
Decreased investment as borrowing costs rise and money supply contracts
C
A sudden increase in inflation as consumers anticipate higher future prices
D
Stabilization of the economy through increased money supply
Understanding the Answer
Let's break down why this is correct
Answer
When a country faces rapid inflation, the central bank may choose to implement a contractionary monetary policy to help control rising prices. This means they will reduce the amount of money in circulation and increase interest rates, making it more expensive to borrow money. As a result, people and businesses might spend less because loans are costlier, leading to a decrease in overall demand for goods and services. For example, if a small business finds it harder to afford a loan to expand, it may delay hiring new employees or purchasing new equipment. In the short term, this can help slow down inflation, but it may also lead to slower economic growth or even a recession.
Detailed Explanation
When the central bank uses contractionary policy, it raises interest rates. Other options are incorrect because Some might think lower interest rates lead to more spending; It's a common mistake to think that higher prices will always come quickly.
Key Concepts
Contractionary Monetary Policy
Inflation Control
Consumer Behavior
Topic
Contractionary Monetary Policy
Difficulty
hard level question
Cognitive Level
understand
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