Applying contractionary monetary policy when the inflation rate is near zero could cause:
A) inflation.
B) stagflation.
C) deflation.
D) Monetary policy does not affect prices when the inflation rate is near zero.

Question

Quizplus · Accepted Answer

Contractionary monetary policy, such as decreasing the money supply or increasing interest rates, will reduce spending and decrease demand in the economy. When the inflation rate is near zero, this decrease in spending may lead to deflation, or a decrease in prices.

Applying Contractionary Monetary Policy When the Inflation Rate Is near Zero