Which best explains how contractionary policies can hamper economic growth?

Which best explains how contractionary policies can hamper economic growth?

1. They increase consumer demand.
2. They can increase inflation.
3. They reduce taxes which raises deficits.
4. They reduce disposable income.

Answer:- 4. They reduce disposable income.

Contractionary policies can lessen disposable income, which can directly influence the economic growth of the nation. A contractionary policy refers to the monetary measure to reduce government spending or the rate of monetary expansion by a central bank. It is a macroeconomic tool used to combat rising inflation. Fiscal policy that surges aggregate demand directly through an increase in government spending is characteristically termed expansionary or “loose.” By difference, fiscal policy is frequently considered contractionary or “tight” if it reduces demand via lower spending.

This example of contractionary fiscal policy could be when the government resolves to decrease government spending. Meaning, that government programs, like the forest service, healthcare benefits, or the military, will receive less funding.

 

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