ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The government does this by increasing taxes, reducing public spending, and cutting public sector pay or jobs. Where expansionary fiscal policy involves spending deficits, contractionary fiscal policy is characterized by budget surpluses.

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 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.

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: -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.