Which of the following is considered contractionary fiscal policy?
A)Congress increases the income tax rate.
B)Congress increases defense spending.
C)Legislation removes a college tuition deduction from federal income taxes.
D)The New Jersey legislature cuts highway spending to balance its budget.

Question

Quizplus · Accepted Answer

Increasing the income tax rate reduces disposable income, which leads to decreased consumer spending and decreased aggregate demand. This is contractionary fiscal policy.

Answer: C
 Removing the college tuition deduction from federal income taxes reduces the disposable income of those who previously claimed the deduction, leading to reduced consumer spending and decreased aggregate demand. This is also contractionary fiscal policy.

Answer: D may also be considered contractionary fiscal policy as it reduces government spending, leading to decreased aggregate demand, but it is not as clear-cut as the other choices.

Answer: B is expansionary fiscal policy as increasing defense spending will increase government spending, leading to increased aggregate demand.

Which of the Following Is Considered Contractionary Fiscal Policy