What is Contractionary Policy
Definition: A contractionary policy is a kind of policy which lays emphasis on reduction in the level of money supply for a lesser spending and investment thereafter so as to slow down an economy.
Description: A nation's central bank uses monetary policy tools such as CRR, SLR, repo, reverse repo, interest rates etc to control the money supply flows into the economy. Such measures are used at high growth periods of the business cycle or in times of higher than anticipated inflation. Discouraging spending by way of increased interest rates and reduced money supply helps control rising inflation. It may also lead to increased unemployment at the same time.
The idea here is to make the opportunity cost of holding money high so that people want to hold and spend less of it. The effectiveness of this policy may vary depending upon the specific spending and investment patterns in any economy.
Also See: Contraction, Expansionary Policy, Stabilization Policy, Money Supply, Inflation
