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Analyst Piece

Contractionary Monetary Policy: What is it and How Does it Work?

WHAT IS CONTRACTIONARY MONETARY POLICY? Contractionary monetary policy is the process whereby a central bank deploys various tools to lower inflation and the general level of economic activity. Central banks do so through a combination of interest rate hikes, raising the reserve requirements for commercial banks and by reducing the supply of money through large-scale government bond sales, also known as, quantitative tightening (QT). It may seem counter-intuitive to want to lower
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