ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Contractionary monetary policy can lead to increased unemployment and decreased borrowing and spending by consumers and businesses, which can eventually lead to an economic recession if too aggressively applied.

Detailed explanation-2: -Under contractionary fiscal policies, the economy usually grows by no more than 3% per year. Above this growth rate, negative economic consequences – such as inflation, asset bubbles, increased unemployment and even recessions – may occur.

Detailed explanation-3: -Contractionary Monetary Policy Graph The decrease in consumption spending by consumers and in investment spending by businesses decreases the overall demand for goods and services in the economy. With decreased production, businesses are less likely to hire additional employees and spend more on other resources.

Detailed explanation-4: -Contractionary fiscal policy is said to be in action when the government reduces spending and increases the taxes at the same time in the country. The result of such a move is that there is very less money available in the market. It leads to reduction in the purchasing power which results in declining consumption.