ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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-2: -Contractionary fiscal policy: In contractionary fiscal policy, the government taxes more than it spends-either by increasing tax rates, decreasing spending, or both. This type of fiscal policy is best used during times of economic prosperity.

Detailed explanation-3: -What Are the Effects of Contractionary Policy? A contractionary policy often results in the tightening of credit through increased interest rates, increased unemployment, reduced business investment, and reduced consumer spending. There is commonly an overall reduction in the gross domestic product (GDP).

Detailed explanation-4: -Contractionary policy and anti-inflation policy disadvantages lower incomes by reducing demand for labor, reducing wages and increasing interest payments on debt.

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.