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Contractionary fiscal policy—a decrease in government spending, an increase in tax revenue, or a combination of the two—is expected to temporarily slow economic activity. When the government raises individual income taxes, for example, individuals have less disposable income and generally decrease their spending on goods and services in response.
contractionary fiscal policy. the use of fiscal policy to contract the economy by decreasing aggregate demand, which will lead to lower output, higher unemployment, and a lower price level. Contractionary fiscal policy is used to fix booms. transfer payments.
Contractionary fiscal policy does the reverse: it decreases the level of aggregate demand by decreasing consumption, decreasing investment, and decreasing government spending, either through cuts in government spending or increases in taxes.
Fiscal policy—the use of government expenditures and taxes to influence the level of economic activity—is the government counterpart to monetary policy. Like monetary policy, it can be used in an effort to close a recessionary or an inflationary gap. Some tax and expenditure programs change automatically with the level of economic activity.
Conversely, contractionary fiscal policy—a decrease in government spending, an increase in tax revenue, or a combination of the two—is expected to temporarily slow economic activity. Expansionary Fiscal Policy . Recessions can have serious negative consequences for both individuals and businesses.
By contrast, fiscal policy is often considered contractionary or “tight” if it reduces demand via lower spending. Besides providing goods and services like public safety, highways, or primary education, fiscal policy objectives vary.
Contractionary fiscal policy does the reverse: it decreases the level of aggregate demand by decreasing consumption, decreasing investments, and decreasing government spending, either through cuts in government spending or increases in taxes.
