The core of tight monetary policy is to reduce the money supply and curb the overheating of total demand by reducing the growth rate of money. When this policy was implemented, due to the decrease of credit supply, the market demand for funds increased, and interest rates naturally rose to reflect the scarcity of credit. In the period of high inflation, this measure helps to stabilize the economy and curb price increases.

Accordingly, expansionary monetary policy stimulates aggregate demand by increasing money supply, making credit easier, thus lowering interest rates, especially when economic activity is weak and aggregate demand is lower than production capacity, which is helpful to boost the economy. For example, it is easier for banks to issue loans, and the financing cost of enterprises is reduced, which is conducive to economic recovery.

The practical effects of tight monetary policy include: although the central bank has taken measures such as raising the deposit reserve ratio to recover liquidity, the problem of excess in liquidity in the banking system still exists, making the credit expansion foundation still sufficient; The existence of central bank bills has crowding-out effect on the growth of bank loans, and the growth rate of bank loans is lower than that of deposits; In addition, this policy may also encourage banks to increase the complexity of capital utilization, because the dependence of enterprises on bank loans is reduced, the difference between deposits and loans of banks is widened, and the capital pressure is correspondingly increased.

The above is a brief overview of how tight monetary policy leads to the rise of interest rates and its impact.