What is the impact of contractionary policies on demand?

Contractionary policies are implemented by governments or central banks typically to reduce inflation and control an economy that is growing too quickly. Such policies often include raising interest rates, decreasing government spending, or increasing taxes.

When contractionary policies are enacted, borrowing becomes more expensive and disposable income for consumers tends to decline. This leads to a decrease in consumer spending and business investment, ultimately resulting in a reduction in overall demand in the economy. As demand decreases, inflationary pressures can be alleviated, but the overall economic growth may also slow down.

This understanding of contractionary policies highlights why the selected answer accurately reflects the intended effects on demand.