Question

Restrictive monetary policy that caused 1990 recession

Answer 1

The Federal Reserve Bank sought to counter these concerns by embracing a restrictive monetary policy, through which they hoped to curb inflation and stabilize prices. The result was a dramatic limit in economic growth and one of the major causes of a recession that began in July 1990 and ended in March 1991. ©Right HOPING FOR BRAINLEST BUDDY

Answer 2

Hi

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Restrictive monetary policy is how central banks slow economic growth. It's called restrictive because the banks restrict liquidity. It reduces the amount of money and credit that banks can lend. It lowers the money supply by making loans, credit cards and mortgages more expensive. That constricts demand, which slows economic growth and inflation. Restrictive monetary policy is also known as contractionary monetary policy.
Purpose

The purpose of restrictive monetary policy is to ward off inflation. A little inflation is healthy. A 2 percent annual price increase is actually good for the economy because it stimulates demand. People expect prices to be higher later, so they buy more now. That's why many central banks have an inflation target of around 2 percent.

If inflation gets much higher, it's damaging. People buy too much now to avoid paying higher prices later. This causes businesses to produce more to take advantage of higher demand. If they can't produce more, they'll raise prices further. They take on more workers, so people have higher incomes, so they spend more. It becomes a vicious cycle if it goes too far. That's because it can create galloping inflation, where inflation is in the double-digits. Even worse, it can result in hyperinflation, where prices rise 50 percent a month.

Economic growth wouldn’t be able to keep up with prices. For more, see Types of Inflation.

To avoid this, central banks slow demand by making purchases more expensive. They raise bank lending rates. That makes loans and home mortgages more expensive. It cools inflation and returns the economy to a healthy growth rate of 2-3 percent.