ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Contractionary fiscal policy does the reverse: it decreases the level of aggregate demand by decreasing consumption, decreasing investments, and decreasing government spending, either through cuts in government spending or increases in taxes.

Detailed explanation-2: -Contractionary fiscal policy decreases the level of aggregate demand, either through cuts in government spending or increases in taxes. Contractionary fiscal policy is most appropriate when an economy is producing above its potential GDP.

Detailed explanation-3: -Contractionary fiscal policy: In contractionary fiscal policy, the government taxes more than it spends-either by increasing tax rates, decreasing spending, or both. This type of fiscal policy is best used during times of economic prosperity. Contractionary fiscal policy is the opposite of expansionary fiscal policy.

Detailed explanation-4: -Contractionary monetary policy is enacted to halt exceptionally high inflation rates or normalize the effects of expansionary policy. Tightening the money supply discourages business expansion and consumer spending and negatively impacts exporters, which can reduce aggregate demand.