Contractionary monetary policy

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Contractionary Monetary Policy

A contractionary monetary policy increases interest rates in order to slow the growth of the money supply and bring down inflation.

This can slow economic growth and even increase unemployment but is often seen as necessary to cool down the economy and keep prices in check.

In the early 1980s with inflation hovering in the double digits, the Fed raised its benchmark interest rate to a record 20%. Though the high rates caused a recession, it managed to bring inflation back to the desired range of 3% to 4% over the next few years.

Reference no: EM133183940

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