Question

Suppose there is a fiscal contraction. Which of the following is a complete list of the variables that must decrease? A) consumption B) consumption and investment C) consumption and output D) consumption, output and the interest rate E) consumption, output and investment

Answer 1

Answer:

C) consumption and output

Explanation:

A fiscal contraction refers to decreasing a government's deficit. A government has a deficit when it spends more than the revenue it gets from taxes. Therefore if the government wants to reduce its deficit, it will decrease public expenditure and/or increase taxes. Any of those actions will also lead to a decrease in public consumption and total economic output.