ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -the use of fiscal policy to contract the economy by decreasing aggregate demand, which will lead to lower output, higher unemployment, and a lower price level.

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 monetary policy will shift aggregate demand to the left from AD0 to AD1, thus leading to a new equilibrium (E1) at the potential GDP level of output.

Detailed explanation-4: -A contractionary fiscal policy shifts the Aggregate Demand curve to the left. This will lower equilibrium price level (when it’s not in horizontal range) and lower equilibrium GDP (when it’s not in vertical range).

Detailed explanation-5: -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.