ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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-2: -The government can use contractionary fiscal policy to slow economic activity by decreasing government spending, increasing tax revenue, or a combination of the two. Decreasing government spending tends to slow economic activity as the government purchases fewer goods and services from the private sector.

Detailed explanation-3: -Key Takeaways. Contractionary fiscal policy is when elected officials either cut spending or increase taxes. It is disliked by voters who want to keep government benefits. The unpopularity of contractionary policy increases the budget deficit and national debt.

Detailed explanation-4: -Contractionary fiscal policy occurs when Congress raises tax rates or cuts government spending, shifting aggregate demand to the left. Figure 1 uses an aggregate demand/aggregate supply diagram to illustrate a healthy, growing economy.