If a central bank uses the tools of monetary policy to reduce the demand for goods and services, the likely result is lower inflation and higher unemployment in the short run.
Contractionary monetary policy is used by central banks to lower inflation. By limiting the number of money banks may lend, they diminish the money supply. Loans are costlier because banks impose higher interest rates. Less borrowing from people and corporations slows growth.
Maximum employment, stable prices, and moderate long-term interest rates are the objectives of monetary policy. The Fed can maintain stable prices and provide the conditions for long-term economic development and maximum employment through conducting effective monetary policy.
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