ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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-2: -How does contractionary fiscal policy affect economic growth? 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: -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.