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A tight monetary policy is a strategy that is usually invoked when there is concern about the rate of growth in a given economy. Generally, the policy is invoked by the financial agency within a particular nation when the economy appears to be growing at a pace that is considered to be too fast. The idea behind the tight money policy is to slow down the rate of inflation that often comes along with excessively rapid growth.
In the United States, the Federal Reserve is normally the entity that invokes a tight monetary policy. This is accomplished by raising the short-term interest rates that are available to consumers. This action has in times past shown an ability to aid in curbing inflation, as it tends to inhibit lending somewhat and thus slow the economy by a small margin.
At the same time, the Federal Reserve may choose to sell Treasuries as a means of helping to slow the pace of the economy. This aspect of the central bank policy functions mainly by taking extra capital out of the open markets. Once the economy has slowed to a pace that is considered to be desirable, the Reserve can follow through with repaying the sale price of the Treasuries, along with applicable interest.
Applying a tight money approach to an economy that appears to be growing too quickly is one way of preventing the economy from getting into a runaway inflationary period. Slowing the growth means slowing inflation. In turn, the invocation of a tight monetary policy means minimizing the chances that inflation will grow to the point that one or more subsets of consumers will suddenly find themselves unable to keep up with the pace, and begin to experience financial hardship.
Essentially, the main goal of a tight monetary policy is to keep the economy within a fairly stable state that is in the best financial interests of the greatest number of consumers within the nation. While there are usually other factors and strategies that are used in conjunction with a tight monetary policy, this approach is often one of the first methods to be invoked when an economy is believed to be growing too quickly.
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