If the effects of contractionary fiscal policy hit when the economy is already contracting,
A) the effects could lead to even deeper recession.
B) the policy will have no effect.
C) the policy is called an automatic stabilizer.
D) it may lead to excessive aggregate demand and inflation.
E) it will lead to stagflation.

Question

Quizplus · Accepted Answer

Contractionary fiscal policy, such as decreasing government spending or increasing taxes, is intended to reduce aggregate demand and slow down an overheating economy. However, if this policy is implemented when the economy is already contracting, it can exacerbate the recession by further reducing aggregate demand. This can lead to even deeper recession, making choice A the best answer.

If the Effects of Contractionary Fiscal Policy Hit When the Economy