ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -A contractionary policy is a tool used to reduce government spending or the rate of monetary expansion by a central bank to combat rising inflation. The main contractionary policies employed by the United States include raising interest rates, increasing bank reserve requirements, and selling government securities.

Detailed explanation-2: -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.

Detailed explanation-3: -Contractionary policy is used to control inflation. Expansionary fiscal policy is said to be in action when the government increases the spending and lowers tax rates for boosting economic growth. This increases consumption as there is a rise in purchasing power.

Detailed explanation-4: -How does contractionary fiscal policy affect economic growth? Contractionary fiscal policies typically slow economic growth. Reducing government spending slows an economy, as does increasing tax revenue. However, contractionary fiscal policy is typically used to slow an economy that is growing quickly.

Detailed explanation-5: -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.