Definition of Contractionary policy:
A variation of federal fiscal policy with the goal of slowing down a rapidly expanding economy. The objective is to curb inflation by restricting the money supply. By tightening the money supply, spending is discouraged. The policy can be enacted by: 1) increasing interest rates, 2) raising bank reserve requirements or 3) taking money out of circulation (raising bond rate to encourage long-term borrowing).
Contractionary policy is a monetary measure referring either to a reduction in government spending—particularly deficit spending—or a reduction in the rate of monetary expansion by a central bank. It is a type of macroeconomic tool designed to combat rising inflation or other economic distortions created by central banks or government interventions. Contractionary policy is the polar opposite of expansionary policy.
Contractionary policies aim to hinder potential distortions to the capital markets. Distortions include high inflation from an expanding money supply, unreasonable asset prices or crowding-out effects, where a spike in interest rates leads to a reduction in private investment spending such that it dampens the initial increase of total investment spending. While the initial effect of the contractionary policy is to reduce nominal gross domestic product (GDP), which is defined as the gross domestic product (GDP) evaluated at current market prices, it often ultimately results in sustainable economic growth and smoother business cycles.
How to use Contractionary policy in a sentence?
- The contractionary policy was in place and that was good because it would help if things did not go as planned.
- Contractionary policies are typically issued during times of extreme inflation.
- Over time the contractionary policy hoped to control the increasingly high inflation growth rate without causing a large amount of unemployment in the economy.
- Contractionary policies are macroeconomic tools designed to combat economic distortions caused by an overheating economy.
- You need to make sure that you follow any contractionary policy so that you are doing everything you are obligated to.
- Contractionary policies aim to reduce the rates of monetary expansion by central banks.
Meaning of Contractionary policy & Contractionary policy Definition