Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It reduces borrowing costs, encouraging increased spending.
B
It raises interest rates, leading to decreased spending and investment.
C
It increases the money supply, which stimulates economic growth.
D
It stabilizes prices by lowering taxes for consumers.
Understanding the Answer
Let's break down why this is correct
Answer
Contractionary monetary policy is when a country's central bank decides to reduce the money supply to control inflation. When this happens, interest rates usually rise, making loans and credit more expensive for consumers. As a result, people may think twice before borrowing money to buy big-ticket items like cars or homes, leading to less spending overall. For example, if someone was planning to take out a loan for a new car, they might delay that purchase because higher interest rates mean they would have to pay more in the long run. This decrease in consumer spending helps slow down inflation but can also lead to slower economic growth.
Detailed Explanation
When the central bank raises interest rates, borrowing money becomes more expensive. Other options are incorrect because This option suggests that borrowing costs go down, which is not true; This choice says the money supply increases, but contractionary policy actually reduces it.
Key Concepts
Contractionary Monetary Policy
Inflation Control
Interest Rates
Topic
Contractionary Monetary Policy
Difficulty
medium level question
Cognitive Level
understand
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