Question

What is the effect of contractionary?

Answer 1

This slows economic development and brings down inflation. If implemented too vigorously, contractionary policy may eventually cause an economic recession by increasing unemployment and decreasing borrowing and spending by consumers and firms.

Notably, the purpose of contractionary monetary policy is to lower rather than to halt the rate of demand for goods and services. Therefore, a contractionary policy that raises interest rates can be employed to reduce inflation and return the economy to the dual mandate's price stability goal. Contractionary fiscal policy aims to reduce growth to a level that is healthy for the economy. That equates to 2% to 3% annually. 1 An economy that expands by more than 3% has four unfavorable effects. Inflation is caused. The government's decision to cut spending could be a contractionary fiscal policy example. When the economy is in contraction, it means that it is experiencing a downturn as a whole. The business cycle often experiences a contraction after its peaks but before it enters a trough.

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