What is a Contractionary Policy?

Contractionary Policy refers to the monetary policy which aims to slow down the economy by introducing a reduction in money supply for lesser money and investment. There are many economic tools used by the Central Bank of every nation like CRR, SLR, Repo, Reverse Repo, Interest Rate etc. to keep a check on the volume of money flowing in the system.

The Bank resorts to such measures during excessively high inflation or even during growth phases of the business cycle. The Bank checks the economy by increasing rates of interest and reducing the money supply which in turn puts a curb on the inflation. Such condition may lead higher unemployment. The effectiveness of this strategy is often dependent on the specific spending and investment patterns of the economy.