AP MacroeconomicsMoney & Monetary Policy
Contractionary Monetary Policy
Contractionary monetary policy decreases the money supply to raise interest rates and reduce inflation.
The central bank sells bonds, raises the discount rate, or increases the reserve requirement. Higher interest rates reduce investment and consumption, shifting aggregate demand left. It is used to fight high inflation.
Formula / Example
Sell bonds → ↓ money supply → ↑ interest rate → ↓ investment → ↓ AD.
Interactive graph
Money Market →
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Study module
Monetary Policy →
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