Contractionary Policy

When central banks reduce the money supply, they are engaging in contractionary monetary policy to slow down the rate of economic expansion and reduce inflationary pressures. Raising interest rates, increasing banks’ reserve requirements and selling government bonds (or other assets held on-balance sheet) are all examples of contractionary monetary policy. When governments alter their spending and/or tax collection policies to affect economic growth it is a form of fiscal policy. A reduction in government spending or an increase in taxes are both examples of fiscal contraction.