Contractionary policy refers to measures taken by a government or central bank to reduce the money supply and curb inflation. This can involve increasing interest rates, which makes borrowing more expensive and encourages saving. By doing so, spending decreases, leading to a slowdown in economic activity. Another tool of contractionary policy is reducing government spending or increasing taxes. These actions aim to decrease overall demand in the economy, helping to stabilize prices. Central banks, like the Federal Reserve, often implement these policies to maintain economic balance and prevent overheating.