Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The central bank raises interest rates to curb excessive borrowing and spending as inflation rises.
B
The central bank lowers interest rates to encourage consumer spending during a recession.
C
The central bank increases the money supply to stimulate economic growth.
D
The central bank maintains current interest rates while inflation continues to rise.
Understanding the Answer
Let's break down why this is correct
Answer
Contractionary monetary policy is a tool used by central banks to reduce the amount of money in circulation, usually to control inflation. For example, if a central bank notices that prices are rising too quickly, it might increase interest rates. Higher interest rates make borrowing more expensive, which can lead to less spending and investment by businesses and consumers. Imagine a family that wants to buy a new car; if interest rates go up, they might decide to wait and save more money instead of taking a loan. This decrease in spending helps slow down price increases and stabilize the economy.
Detailed Explanation
When the central bank raises interest rates, it makes borrowing more expensive. Other options are incorrect because This option suggests lowering interest rates, which encourages people to spend more; Increasing the money supply means more money is available, which can lead to more spending.
Key Concepts
Contractionary Monetary Policy
Inflation Control
Interest Rates
Topic
Contractionary Monetary Policy
Difficulty
easy level question
Cognitive Level
understand
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