Contractionary fiscal policy consists of a(n):
A)increase in government purchases, an increase in taxes, and/or an increase in transfer payments.
B)decrease in government purchases, a decrease in taxes, and/or a decrease in transfer payments.
C)decrease in government purchases, an increase in taxes, and/or a decrease in transfer payments
D)increase in government purchases, a decrease in taxes, and/or an increase in transfer payments.
E)decrease in government purchases, a decrease in open market operations, and/or an increase in the discount rate

Question

Quizplus · Accepted Answer

Contractionary fiscal policy involves decreasing government spending, increasing taxes, and/or decreasing transfer payments in order to decrease aggregate demand and reduce inflationary pressures in the economy. Choice C is the only option that includes a decrease in government purchases and an increase in taxes, which are both contractionary measures. The other options include expansionary measures, such as increases in government purchases, transfer payments, or decreases in taxes. Choice E includes a decrease in open market operations and an increase in the discount rate, which are tools used by the Federal Reserve for monetary policy, not fiscal policy.

Contractionary Fiscal Policy Consists of A(n)