Question

If both monetary policy and fiscal policy were used at the same time to contract the economy, which set correctly describes the

Answer 1

Answer:

The result would likely be a contraction of the economy. The GDP would probably fall or grow less.

A goverment applies contractionary fiscal policy when it reduces spending. Less government spending can reduce economic activity because spending can be a form of investment. For example, when the government spend less on building schools, roads and infraestructure, the people who build those lose their jobs, receive less income, consume less, and the economy contracts.

Contractionary monetary policy is applied by the central bank (the Federal Reserve in the United States). It would consist in reducing the amount of money available (the money supply). Less money in the economy results in higher interest rates. This creates a cycle in which banks give less loans, and investment falls. Less investment contracts the economy.