ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Contractionary fiscal policy is most appropriate when an economy is producing above its potential GDP.

Detailed explanation-2: -Contractionary fiscal policies typically slow economic growth. Reducing government spending slows an economy, as does increasing tax revenue. However, contractionary fiscal policy is typically used to slow an economy that is growing quickly.

Detailed explanation-3: -To combat inflation, the government could use contractionary fiscal policy. In this case, it might raise taxes and decrease government spending in an attempt reduce the total level of spending.

Detailed explanation-4: -The main contractionary policies employed by the United States include raising interest rates, increasing bank reserve requirements, and selling government securities.

Detailed explanation-5: -Expansionary fiscal policy is used to prevent or end recessions, or to prevent high unemployment. The Economic Stimulus Act of 2008 allowed the government to put money directly into consumers’ pockets in the hope of stimulating spending.