ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -As economic growth weakens, or when it is in recession, a government can enact an expansionary fiscal policy-for example, by raising expenditure without an offsetting increase in taxation. Conversely, by reducing expenditure and maintaining tax revenues, a contractionary policy might reduce economic activity.

Detailed explanation-2: -When the economy is booming, governments may make use of contractionary fiscal policy in order to reduce the government’s budget deficit and the national debt, saving money for future times when expansionary policy may be necessary.

Detailed explanation-3: -Contractionary fiscal policy is used to slow economic growth, such as when inflation is growing too rapidly. The opposite of expansionary fiscal policy, contractionary fiscal policy raises taxes to cut spending. As consumers pay more taxes, they have less money to spend, and economic stimulation and growth slow.

Detailed explanation-4: -Note that the goal of contractionary monetary policy is to decrease the rate of demand for goods and services, not to stop it. So, higher interest rates through contractionary policy can be used to dampen inflation and move the economy back to the price stability component of the dual mandate.

Detailed explanation-5: -Contractionary monetary policy is a macroeconomic tool that a central bank-in the US, that’s the Federal Reserve-uses to reduce inflation. The goal is to slow the pace of the economy by reducing the money supply, or the amount of cash and readily cashable funds circulating throughout the nation.