Question

Determine which statement below is true of ONLY contractionary policy.

• This includes monetary and fiscal policy

• Lowering interest rates are an example of this

• This can help reduce unsustainable levels of production

• Too much of this can lead only to inflation

Answer 1

The contractionary policy might be either monetary or fiscal policy or both. Hence, contractionary policy includes monetary and fiscal policy.

Contractionary monetary policy decreases money supply and increases interest rates. Therefore lowering interest rates are not an example of this.

The contractionary policy either fiscal or monetary by lowering aggregate demand can help reduce unsustainable levels of production.

Too much of the contractionary policy only to deflation not Inflation.

Both first and third statements are correct. However, to choose between the two, third statement would be more appropriate.

So, the statement below which is true of only Contractionary policy is that this can help reduce unsustainable levels of production.

Hence, third option is correct.