Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It increases interest rates, reducing consumer and business spending.
B
It decreases taxes, allowing more disposable income for consumers.
C
It increases government spending, boosting aggregate demand.
D
It lowers interest rates, encouraging borrowing and spending.
Understanding the Answer
Let's break down why this is correct
Answer
Contractionary monetary policy is a way for a country's central bank to reduce the amount of money in circulation. When the central bank raises interest rates or sells government bonds, it becomes more expensive to borrow money. This means that businesses and consumers are less likely to take out loans to spend or invest. As a result, overall spending in the economy decreases, which helps slow down inflation and stabilize prices. For example, if a central bank raises interest rates, a business may decide not to expand or hire more workers, which can help prevent an economic slowdown from becoming a recession.
Detailed Explanation
This policy raises interest rates. Other options are incorrect because Some might think lowering taxes gives people more money to spend; It's easy to confuse this with increasing government spending.
Key Concepts
aggregate demand
recession prevention.
Topic
Contractionary Monetary Policy
Difficulty
medium level question
Cognitive Level
understand
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