Contractionary monetary policies are often adopted to counterbalance the effects of a period of economic expansion, when the economy is likely to be over-stimulated due to excessive liquidity in the market. During a period of over-expansion, inflation is likely to become more rampant and speculation is often encouraged by conditions of easy credit access and low interest rates. Contractionary policies counteract this, leading to the increase of bank savings rates and the decrease of consumption and the overall flow of money in the economy.

Contractionary policies are used to keep a check on inflation, bringing it back to the central bank's targeted level. To do this, central banks reduce the money supply by raising interest rates and/or reducing the amount of money made available for lending. By raising interest rates and restricting the amount of money accessible, banks are less likely to lend and consumers are less likely to borrow, resulting in a slowdown in spending in the economy. The contractionary policy not only reduces inflationary pressures in the economy, but also promotes savings and can help to reduce the amount of existing debt.

Contractionary policies are usually seen as a short-term solution to ensure economic stability and are often followed by expansionary policies. This helps to boost consumer spending and bring back economic growth.

In addition, contractionary policies have been used by governments to avert recessions and other forms of economic downturns. In this way, they can serve as a tool to combat recessionaryaryaryary pressures and help support a high level of economic performance.

It is essential that contractionary policies are implemented with caution, as too much austerity can cause damage to an economy. Contractionary policies work best when targeted to specific areas needing stabilization and when used in moderation so as not to over-restrict the flow of money in the economy. A balanced approach that uses both expansionary and contractionary policies may be more successful in controlling the economy. Ultimately, contractionary policies are designed to control the amount of money in circulation and when implemented correctly, can help to maintain economic stability.