A situation when the government most likely have a contractionary fiscal policy is D. when the level of economic output is running unusually high.
<h3>What is contractionary fiscal policy?</h3>
Contractionary fiscal policy is when the government collects more money than it spends. This is usually done by increasing taxes and reducing government expenditure.
During a recession, unemployment will <u>increase</u> tax revenue collected by the government will <u>decrease</u>, and spending by the government will <u>increase</u>.
According to the new classical critique of fiscal policy, consumers increase their savings in response to government spending because they believe they will eventually need the saved money when they have to pay higher taxes.
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