Question

Which best explains how contractionary policies can hamper economic growth

Answer 1

Contractionary policies hamper economic growth by reducing the disposable income of people in an economy.

Further explanation:

Contractionary fiscal policy:  

Contractionary fiscal policy is a policy in which the government spends less to decrease the overall economic activity. The primary rationale behind the contractionary fiscal policy is to lower the rising inflation in the economy. It leads to a lower level of overall output and lowers interest rates. This policy lowers the economic activity that leads to lower disposable income in the hands of people. This further hampers economic growth by low spending in the economy.

Contractionary monetary policy:  

Contractionary monetary policy is a policy in which the central bank reduces the supply of money in the economy to cope up with the rising inflation. It leads to a lower level of output and higher interest rates. This policy lowers money in the economy that leads to lower disposable income in the hands of the public which further hampers economic growth.

Therefore, by reducing the disposable income and purchasing power, contractionary policies hamper economic growth.

Learn more:

1. Learn more about Economic Pie

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2. Learn more about Fiscal Policy

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3. Learn more about Monetary Policy

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Answer details:

Grade: Senior School

Subject: Economics

Chapter: Aggregate Demand and Aggregate Supply

Keywords: which, best explains, how, contractionary policies, hamper, economic growth, contractionary fiscal policy, contractionary monetary policy, purchasing power, disposable income, reducing, disposable income and purchasing power, low spending.

Answer 2

"They reduce disposable income" explains how contractionary policies can hamper economic growth

Further explanation

Disposable income is the amount of money that households have,available for spending and saving after income taxes accounted.

Expansionary fiscal policy is an increase in government expenditures, also a decrease in taxes that causes the government's budget deficit to increase or its budget surplus to decrease. In short, expansionary fiscal policy boosts economic growth by lowering interest rates.

Whereas contractionary fiscal policy is defined as a decrease in government expenditures, also an increase in taxes that causes the government's budget deficit to decrease or its budget surplus to increase. Contractionary money policy is used to combat inflation.  In short, contractionary fiscal policy hamper economic growth by increasing interest rates.

Contractionary policy increases the cost of borrowing. It can decreases GDP and dampens inflation, but also leads to reduced disposable income. Another negative side effect is it makes an increase in the unemployment rate.  Disposable income itself is the amount of money that households have, available for spending and saving after income taxes accounted.

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Answer details

Grade:  9

Subject:  social studies

Chapter:  hamper economic growth

Keywords:   hamper economic growth