what is a contractionary policy 
a contractionary policy is a monetary measure to reduce government spending or the rate of monetary expansion by a central bank it is a macroeconomic tool used to combat rising inflation the main contractionary policies employed by the united states government include raising interest rates increasing bank reserve requirements and selling government securities understanding contractionary policiescontractionary 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 contractionary policy notably occurred in the early 1980s when the then federal reserve chair paul volcker finally ended the soaring inflation of the 1970s at their peak in 1981 target federal fund interest rates neared 20 1 measured inflation levels declined from nearly 14 in 1980 to 3 2 in 1983 2tools used for contractionary policiesboth monetary and fiscal policies implement strategies to combat rising inflation and help to contract economic growth contractionary policy is often connected to monetary policy with central banks such as the u s federal reserve able to enact the policy by raising interest rates real world examplethe covid 19 pandemic affected businesses ability to produce and consumers ability to consume many governments resorted to large fiscal stimuli which boosted consumption leading to supply chain bottlenecks and price tensions the government support throughout the crisis supported a strong economic rebound with both gdp and employment recovering at a remarkable pace through 2021 3however in 2022 with growing signs of inflation and to achieve maximum employment and keep the inflation at the rate of 2 percent over the long run the federal reserve decided to raise the target range for the federal funds rate the fed views ongoing increases in the target range as appropriate to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time 4contractionary policy vs expansionary policya contractionary policy attempts to slow the economy by reducing the money supply and fending off inflation an expansionary policy is an effort that central banks use to stimulate an economy by boosting demand through monetary and fiscal stimulus expansionary policy is intended to prevent or moderate economic downturns and recessions 