ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Ans: False. A fiscal contraction improves the budget balance, and leads to a lower interest rate and a higher investment in the medium run. Hence, it may actually lead to an economic expansion in the short run, as firms and households update their expectations on future output and future interest rates. 4.

Detailed explanation-2: -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.

Detailed explanation-3: -The answer is True. Contractionary fiscal policy is a tool a country uses to reduce inflation when the economy is producing above the potential GDP and has a positive output gap.

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: -False. PRO-CYCLICAL contractionary fiscal policy is meant to fight inflation, but causes recession.