ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Expansionary fiscal policy includes either increasing government spending or decreasing taxes. An economy that is producing too much needs to be contracted. In that case, contractionary fiscal policy (either decreasing government spending or increasing taxes) is the correct choice.

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

Detailed explanation-3: -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-4: -This is called contractionary fiscal policy. To reduce the total level of spending, the government could increase tax rates. As more income is collected in taxes, less is available for spending, reducing inflationary pressures. Less government spending would work in the same way.

Detailed explanation-5: -When the government uses fiscal policy to decrease the amount of money available to the populace, this is called contractionary fiscal policy. Examples of this include increasing taxes and lowering government spending.