<u>Contractionary policies hamper economic growth by reducing the disposable income of people in an economy.
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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.
<u>Therefore, by reducing the disposable income and purchasing power, contractionary policies hamper economic growth.
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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.