Question

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

Answer 1

Answer:

The correct answer is the option is D.

Explanation:

Contractionary policy is used to reduce economic activities. it used in case of inflation. Fiscal policy is the tool to affect the economic variables through government spending and taxation.

The most contractionary policy will be if the government spending is reduced and taxes are increased. This will lead to a reduction in disposable income. Consequently, demand will decline as well. This will further lead to a fall in the price level. Thus curbing inflationary pressures.