Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Interest rates decrease
B
Interest rates remain unchanged
C
Interest rates increase
D
Interest rates fluctuate wildly
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, one of the main effects is that interest rates increase. Higher interest rates make borrowing more expensive, which means people and businesses are less likely to take out loans. For example, if a bank raises its interest rate from 3% to 5%, someone wanting to buy a house might decide to wait because their monthly payments would be higher. This decrease in borrowing can help slow down spending in the economy, which ultimately helps keep prices stable.
Detailed Explanation
When the government uses contractionary monetary policy, it reduces the amount of money in the economy. Other options are incorrect because Some might think that less money means lower rates, but it's the opposite; It's a common mistake to think rates stay the same.
Key Concepts
interest rates
Topic
Contractionary Monetary Policy
Difficulty
easy level question
Cognitive Level
understand
Ready to Master More Topics?
Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.