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What is Tight Monetary Policy?

In the United States, the Federal Reserve may enact a tight monetary policy.
As a form of monetary policy, nations will at times intentionally aim to decrease the rate of inflation, potentially increasing the value of currency.
Tight money can prevent consumers without excellent credit and high wages from receiving a loan.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 22 November 2014
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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.

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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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bear78
Post 3

@ddljohn-- Economic growth is good but if it occurs too quickly, then supply and labor will not be able to keep up with it. When the economy grows rapidly, demand suddenly goes up and supply can't keep up. This causes prices (inflation) to go up.

What we want is stable growth, growth that is average but sustainable.

Also, I want to point out the difference between fiscal policy vs monetary policy. Monetary policy is what the Central Bank does. Fiscal policy is what Congress does. Tight monetary policy has to be supported by fiscal policies to be successful.

fify
Post 2

As far as I know, a tight monetary policy is not always necessary. The economy may stabilize itself on its own. Basically what happens is that as growth increases, inflation increases. When inflation increases, people have less spending power and buy less. So this automatically causes a fall in the economy.

I think a tight monetary policy is used if the economy doesn't stabilize on its own as a result of inflation.

ddljohn
Post 1

Isn't economic growth a good thing? How can the economy possibly grow too fast?!

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