Which of the following might be considered the most contractionary set of fiscal policies?
A) increase government purchases, increase taxes, and decrease transfer payments
B) decrease government purchases, increase taxes, and decrease transfer payments
C) increase government purchases, decrease taxes, and increase transfer payments
D) decrease government purchases, decrease taxes, and decrease transfer payments

Question

Which of the following might be considered the most contractionary set of fiscal policies?  
A) increase government purchases, increase taxes, and decrease transfer payments 
B) decrease government purchases, increase taxes, and decrease transfer payments 
C) increase government purchases, decrease taxes, and increase transfer payments 
D) decrease government purchases, decrease taxes, and decrease transfer payments

Quizplus · Accepted Answer

A contractionary fiscal policy seeks to decrease aggregate demand in the economy, so the most effective combination of policies would be an increase in taxes (to decrease disposable income and reduce consumption) and a decrease in government spending (to decrease overall spending in the economy). Additionally, a decrease in transfer payments (such as welfare or unemployment benefits) would also reduce disposable income and consumption. The combination of decreasing government purchases, increasing taxes, and decreasing transfer payments would be the most contractionary.

Which of the Following Might Be Considered the Most Contractionary