hen the Fed pursues a tight monetary policy, it takes money out of the system by selling Treasury securities and raising the reserve requirement at banks. This raises interest rates because the demand for credit is so high that lenders price their loans higher to take advantage of the demand. Tight money and high interest rates tend to slow economic activity and can bring on a recession. During periods of tight money companies, terminate employees and consumers cut back on their spending. House prices also decline as fewer people are able to afford the boom time prices. So, low liquidity has the opposite effect on the economy from high liquidity.