The set of fiscal policies that would be most contractionary would be a(n):
A) Increase in government spending and taxes
B) Decrease in government spending and taxes
C) Increase in government spending and a decrease in taxes
D) Decrease in government spending and an increase in taxes

Question

Quizplus · Accepted Answer

Decreasing government spending and increasing taxes would have a contractionary effect on the economy as it reduces the amount of money available for individuals and companies to spend and invest. This would reduce demand and potentially slow down economic growth. Option A, increasing both government spending and taxes, could also have some contractionary effect, but the effect of increased spending would partly offset the contractionary effect of increased taxes. Option B, decreasing both spending and taxes, would have more of a neutralizing effect on the economy, rather than an overall contractionary effect. Option C, increasing spending and decreasing taxes, would have a expansionary effect by increasing government spending and leaving individuals and companies with more disposable income to spend and invest.

The Set of Fiscal Policies That Would Be Most Contractionary