Question

If a deficit decreases from -$400 billion to -$100 billion, fiscal policy is considered to be ___________ ..A. expansionaryB. contractionaryC. neutralD. all the above

Answer 1

Answer:

B. contractionary

Explanation:

Fiscal policy is the use of taxation and government spending to achieve certain targeted macroeconomic objectives, such as economic growth, price stability, favorable balance of payment, income redistribution e.t.c.

Any policy that reduces the purchasing power of the people is called contractionary policy and the ones that increases the purchasing power is called expansionary policy.

When government cut spending, it reduces deficit except there is a policy conflict, such policy is called contractionary fiscal policy.

In the same vein, when government deliberately increases taxation it is  a contractionary fiscal policy, in this case the government gets more money that directly reduces deficit except there is a policy conflict.