Contractionary fiscal policy should be used if:
A)aggregate demand-aggregate supply equilibrium is below potential output.
B)aggregate demand-aggregate supply equilibrium is above potential output.
C)aggregate demand-aggregate supply equilibrium is equal to potential output.
D)none of the above.

Question

Quizplus · Accepted Answer

Contractionary fiscal policy involves reducing government spending and/or increasing taxes in order to decrease aggregate demand. This should be used when the economy is operating above potential output, as indicated by an inflationary gap. By reducing aggregate demand, contractionary fiscal policy helps to bring the economy back to its potential output level and reduce inflationary pressures.

Contractionary Fiscal Policy Should Be Used If