What is the core objective of contractionary fiscal policy?

What is the core objective of contractionary fiscal policy?

• A. Lowering taxes and increasing spending
• B. Raising taxes and decreasing spending
• C. Increasing money supply
• D. Reducing government intervention in the economy

Answer: (B)

The core objective of contractionary fiscal policy is to raise taxes and decrease government spending in order to reduce overall demand in the economy. This type of policy is typically employed during periods of high inflation, where the goal is to cool down an overheating economy by limiting consumer spending and investment. By increasing taxes, disposable income for households decreases, which tends to lower consumption. Additionally, by cutting government spending on programs and projects, there is a direct reduction in economic activity. This is intended to stabilize prices and control inflation, ensuring overall economic health in the long term. In contrast, the other options emphasize either increasing money supply or reducing government involvement, which aligns more closely with expansionary policies aimed at stimulating growth rather than contractionary efforts intended to curb inflation. The focus on lowering taxes or increasing spending is inconsistent with the goals of contractionary fiscal policy, which seeks to restrain economic activity.

The core objective of contractionary fiscal policy is to raise taxes and decrease government spending in order to reduce overall demand in the economy. This type of policy is typically employed during periods of high inflation, where the goal is to cool down an overheating economy by limiting consumer spending and investment. By increasing taxes, disposable income for households decreases, which tends to lower consumption. Additionally, by cutting government spending on programs and projects, there is a direct reduction in economic activity. This is intended to stabilize prices and control inflation, ensuring overall economic health in the long term.

In contrast, the other options emphasize either increasing money supply or reducing government involvement, which aligns more closely with expansionary policies aimed at stimulating growth rather than contractionary efforts intended to curb inflation. The focus on lowering taxes or increasing spending is inconsistent with the goals of contractionary fiscal policy, which seeks to restrain economic activity.