Question

Why does contractionary monetary policy cause interest rates to rise?

Short answer

It results in an increased unemployment rate and a decrease in the growth rate of the GDP of the economy.

Step-by-step solution

Concept Introduction

Contractionary Monetary Policy Any financial policy that reduces the rates of interest and further, stimulates borrowing is known as loose financial policy or expansionary financial policy. Still, any financial policy that increases the rates of interest and also, reduces borrowing in frugality is known as tight financial policy or contractionary financial policy. Similar programs are veritably important in fighting affectation.

Explanation

The contractionary policy is also known as a tight financial policy. It reduces the force of loanable finances in frugality. As a result, the interest rates increase in frugality. It's principally a profitable policy used to combat affectation. By dwindling the plutocrat force through this policy, the cost of borrowing increases and affectation is dampened. Although, there are some sides to this policy. It results in an increased severance rate and drops in the growth rate of the GDP of the frugality.