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 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-3: -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-4: -Fiscal policy that increases aggregate demand directly through an increase in government spending is typically called expansionary or “loose.” By contrast, fiscal policy is often considered contractionary or “tight” if it reduces demand via lower spending.

Detailed explanation-5: -Contractionary fiscal policy is when the government either cuts spending or raises taxes. It gets its name from the way it contracts the economy. It reduces the amount of money available for businesses and consumers to spend.