Question

An example of contractionary fiscal policy is:

Answer 1

Answer:

The correct answer is option d.

Explanation:

Fiscal policy is a tool to affect economic activities and GDP through changes in government spending and tax revenue. Contractionary fiscal policy is used to reduce economic activities. It is adopted in case of inflationary pressure.  

Contractionary fiscal policy may involve a reduction in government spending which will eventually reduce aggregate demand. Or the government could increase the tax rates. This will cause the disposable income of the consumers to reduce.  

As the purchasing power decreases with the decline in disposable income, consumer spending will get reduced as well. This will further cause the aggregate demand to decline.  

The government can use either of them or both at the same time.