Contractionary Monetary Policy

• What is a contractionary monetary policy?

  Contractionary monetary policy is a policy to decrease aggregate demand
• What is contractionary monetary policy?

  Contractionary monetary policy is a policy to decrease aggregate demand
• How does contractionary monetary policy decrease aggregate demand?

  They increase interest rates
• Contractionary monetary Policy increases interest rates which raises the cost of borrowing for businesses and consumers decreasing consumer spending and business investment
• What happens to consumer spending when interest rates increase?

  consumer spending decrease
• Contractionary monetary policy decreases aggregate demand decreasing the price level
• What happens to the price level when aggregate demand increases?

  the price level increases
• •Higher interest rates lead to an appreciation of the currency. This makes imports cheaper which then helps to reduce inflation.
• Do imports become expensive or cheaper when interest rates increase?

  Imports become cheaper
• When interest rates increase does the currency appreciate or depreciate?

  The currency appreciates
• However contractionary monetary policy increases unemployment as business investment decreases
• What happens to business investment due to contractionary monetary policy?

  business investment decreases