What is the impact of contractionary fiscal policy on prices and output?

Question

Quizplus · Accepted Answer

Contractionary fiscal policy involves a decrease in government spending and/or an increase in taxes, which reduces demand in the economy. This reduction in demand leads to lower output and employment, which in turn leads to a decrease in prices as firms lower their prices to encourage more sales. Therefore, the correct answer is D, as prices and output both decrease under contractionary fiscal policy.

What Is the Impact of Contractionary Fiscal Policy on Prices