What are tight money?

Tight money is an economic situation in which less money is available, resulting in a reducing reduction in the available loan. This situation is also known as expensive money and is usually the result of close money. The policy of tight money is a monetary policy that is carried out to solve inflation, with the aim of slowing the inflation rate so that it does not climb out of control. A decrease is available loan is considered an acceptable compromise compared to the consequences of long -term escape inflation. One of the techniques to reduce the amount of money available is to increase reserve requirements. With banks that are needed to hold more money, less money is available for lending, both between banks and from banks to consumer and institution. This contributes to the development of reduced accessibility of the loan. To make fewer people to do it or reduce the amount of loans for which people are eligible. This can be done in cases where there are concerns that people are getting a loan too easily and banks are exposed to the risks of lending to people,who can be more candidates for loan. Inflation often causes relaxation in loans and tightening these policies can help reduce inflation.

The sale of government bonds is another part of the policy of close money. In this case, the government basically sucks money by converting funds on the market into bonds. The government is sitting on money, while people who had these funds hold bonds. The motivation for investors in this case is that they earn constant interest on the bonds they buy and are entitled to repay the nominal value of the bond when it ripens.

Tight money policy requires a delicate. It is important to avoid too far in the opposite direction and lowering the deflation. Too much loan can also lead to an economic decline, because in the case of less available credit there will be naturally less economic activity. Regulatory bodies must walk on a rope in terms offormation of economic policy; They do not want to interfere too much and destabilize the economy, but they also do not want to sit idly while economic disasters take place. The inability to act can be criticized later, although there was no way to predict the outcome of economic events.