Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It lowers interest rates, encouraging more borrowing.
B
It increases borrowing costs, leading to decreased spending.
C
It has no effect on consumer behavior.
D
It directly increases consumer income, boosting spending.
Understanding the Answer
Let's break down why this is correct
Answer
Contractionary monetary policy is when a central bank, like the Federal Reserve, tries to reduce the amount of money in the economy to control inflation. When inflation is high, prices go up, and the central bank may raise interest rates to make borrowing more expensive. This means that consumers are less likely to take out loans for big purchases, like houses or cars, because they will have to pay back more money in interest. For example, if a family wants to buy a new car and interest rates increase, they might decide to wait or choose a cheaper model instead. As a result, overall consumer spending decreases, which can help lower inflation but may also slow down economic growth.
Detailed Explanation
When the government uses contractionary monetary policy, it raises interest rates. Other options are incorrect because Some might think that higher interest rates encourage borrowing; It's a common belief that monetary policy has no effect on how people spend.
Key Concepts
Contractionary Monetary Policy
Inflation Control
Consumer Behavior
Topic
Contractionary Monetary Policy
Difficulty
medium level question
Cognitive Level
understand
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