Question : Contractionary fiscal policy involves:
Option 1: Decreasing government expenditure and increasing taxes
Option 2: Increasing government expenditure and increasing taxes
Option 3: Decreasing government expenditure and decreasing taxes
Option 4: Increasing government expenditure and decreasing taxes
Correct Answer:
Decreasing government expenditure and increasing taxes
Solution : The correct answer is (a) decreasing government expenditure and increasing taxes.
Contractionary fiscal policy is implemented to slow down economic growth and reduce inflationary pressures when the economy is experiencing high levels of inflation or overheating. The objective is to decrease aggregate demand and curb excessive spending in the economy.
To achieve this, the government typically reduces its spending on various goods, services, infrastructure projects, and programs. By decreasing government expenditure, there is less money flowing into the economy, which helps to reduce overall spending and aggregate demand.
By combining decreased government expenditure and increased taxes, contractionary fiscal policy aims to decrease overall spending, reduce inflationary pressures, and stabilize the economy.
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