Question

Which fiscal policy would be the most contractionary? 
A. A $40 billion increase in taxes
B. A $50 billion increase in government spending
C. A $50 billion decrease in government spending
D. A $40 billion decrease in government spending and a $10 billion decrease in taxes

Answer 1

Answer: Option (C) is correct.

Explanation:

Correct option: A $50 billion decrease in government spending would be the most contractionary fiscal policy.

A. Increase the taxes by $40 billion is also a contractionary fiscal policy but it doesn't have a greater impact than decreasing  the government spending by $50 billion.

B. It is an expansionary fiscal policy.

D. There are both expansionary fiscal policy by decreasing taxes by $10 billion and contractionary fiscal policy by decreasing government spending by $40 billion. But it doesn't have much impact as the option (C) is having.

Therefore, Option (C) is having the most contractionary fiscal policy.