Policy makers use a contractionary fiscal policy when they want to close:
A) a recessionary gap.
B) any kind of output gap.
C) an inflationary gap.
D) an open economy.

Question

Quizplus · Accepted Answer

A contractionary fiscal policy is used to reduce aggregate demand and curb inflation, which occurs when the economy is in an inflationary gap. It typically involves decreasing government spending and/or increasing taxes, which reduces disposable income and therefore reduces overall demand. It is not used to close a recessionary gap (Choice A) because in that case, expansionary fiscal policy is needed to increase demand and stimulate economic growth. It is not used to close any kind of output gap (Choice B) because output gaps can be both inflationary and recessionary, and contractionary fiscal policy is not appropriate for stimulating demand in either case. It is not used for an open economy (Choice D) as this question is related to domestic macroeconomic policies rather than international trade.

Policy Makers Use a Contractionary Fiscal Policy When They Want