Question

1. During which of the following situations would the government most likely have a

Answer 1

A situation when the government most likely have a contractionary fiscal policy is D. when the level of economic output is running unusually high.

What is contractionary fiscal policy?

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 increase tax revenue collected by the government will decrease, and spending by the government will increase.

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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