Contractionary fiscal policy occurs when the overall effect of decisions about taxation and spending is to:
A) reduce aggregate demand.
B) increase aggregate demand.
C) reduce aggregate supply.
D) increase aggregate supply.

Question

Quizplus · Accepted Answer

Contractionary fiscal policy is when the government increases taxes and/or decreases government spending in order to decrease aggregate demand. This is done to combat inflation, reduce budget deficits, and stabilize the economy. Therefore, the best choice is A, which states that contractionary fiscal policy reduces aggregate demand.

Contractionary Fiscal Policy Occurs When the Overall Effect of Decisions