Which Best Explains How Contractionary Policies Can Hamper Economic Growth
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Contractionary policies are a type of economic policy used by governments and central banks to reduce inflation and prevent economies from overheating. When implemented, these policies typically decrease the supply of money, increase borrowing costs, and/or increase taxes, thereby decreasing economic growth and capital investments.
Contractionary policies can be used to slow down economic growth when the economy is overheating, as the policies will help to dampen inflation and slow down the demand for goods and services. These policies also help reduce the deficit, by decreasing government and consumer spending,taxation revenues, and private investments.
Unfortunately, contractionary policies also have potential downsides. When the economy is already in a recession, contractionary policies can further inhibit economic growth by reducing consumer spending, capital investments, and job creation. These policies can also make banks and businesses more cautious, by increasing their cost of borrowing and making them less likely to lend money or offer new jobs. Finally, contractionary policies tend to increase income inequality disproportionally, since lower-income households are less able to absorb or respond to the increased costs of borrowing or taxation.
In short, contractionary policies can be a necessary tool to help reduce inflation and promote fiscal responsibility, but must be used with caution.