ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Contractionary fiscal policy is said to be in action when the government reduces spending and increases the taxes at the same time in the country. The result of such a move is that there is very less money available in the market. It leads to reduction in the purchasing power which results in declining consumption.

Detailed explanation-2: -Contractionary fiscal policy includes raising taxes, decreasing spending, or a combination of the two. These actions reduce an economy’s aggregate demand. Businesses slow production as their inventories increase. They may lay off workers or have their workers work fewer hours to produce less.

Detailed explanation-3: -To combat inflation, the government could use contractionary fiscal policy. In this case, it might raise taxes and decrease government spending in an attempt reduce the total level of spending. Many economists suggests that monetary policy, enacted by the Federal Reserve, is more effective for reducing inflation.

Detailed explanation-4: -Contractionary fiscal policy is used to slow economic growth, such as when inflation is growing too rapidly. The opposite of expansionary fiscal policy, contractionary fiscal policy raises taxes to cut spending. As consumers pay more taxes, they have less money to spend, and economic stimulation and growth slow.

Detailed explanation-5: -There are three components of the Fiscal Policy of India: Government Receipts. Government Expenditure. Public Debt.