Last Updated 20 Apr 2022

Which best explains how contractionary policies can hamper economic growth?

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Answered by Jacquelline Hill

The adoption of the fiscal policy by a government depends on the economic state of the country and, accordingly, on ways to balance the economy. Expansionary policy is applied in the period of the economic recession; in order to increase GDP, the government reduces taxes and increases government spending and transfer payments.

Overheating of the economy is also a negative phenomenon, as it leads to rapid inflation. In this case, contractionary policy is implemented with reducing government spending and taxes increasing. As a result, a budget surplus occurs, which is withdrawn from the circulation or used for repayment of external debts. Inflation slows down, but the unemployment rises and the volume of production decreases that cause a slowdown in economic growth. Contractionary fiscal policy, as well as expansionary, has some disadvantages. It can not only slow down the economy but lead to the recession or destabilization.

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Which best explains how contractionary policies can hamper economic growth? essay

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How does contractionary fiscal policy hamper economic growth?

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.

What are the effects of contractionary money policy on disposable income?

Answer: They reduce disposable income. Contractionary money policy is used to combat inflation. The policy involves decreasing the money supply through increase in the discount rate or sale of government bonds or increase in the reserve ratio. Contractionary policy increases the cost of borrowing.

What are the negative effects of expansionary policy?

Expansionary policy is applied in the period of the economic recession; in order to increase GDP, the government reduces taxes and increases government spending and transfer payments. Overheating of the economy is also a negative phenomenon, as it leads to rapid inflation.

Are expansionary taxation policies always appropriate to implement?

If expansionary taxation policies encourage growth, are they always appropriate to implement? a. No, government services could encourage growth but other practices could be more effective based on the economic situation. b. Yes, the private sector can easily and affordably replace all services and facilities cut by the government.

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