Question

What is contractionary policy used for?

To stimulate growth in the economy.
To fight rapid inflation in the economy.
To encourage individuals to spend more.
All of the above

Answer 1

To fight rapid inflation

Step-by-step explanation:

When government notice or discovers that the volume of money in circulation is on the high side, she uses contractionary policy to mop up the excess money in circulation. The aim is to reduce speculation and excess money supply in the economy.

Inflation is the rapid rise in the prices of goods and services which is due to too much money in circulation. When inflation is glaring in an economy, government uses contractionary policy such as increasing taxes and lowering government expenditure.

Increament in taxes would reduce the purchasing power of individuals , household and firms hence reduce the volume of money in circulation. Lowering government spending or expenditure will also reduce excess money in the economy because fewer money will be available in the economy by so doing.