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Contractionary fiscal policy is expected to reduce interest rates, leading to additional investment, and weaken the U.S. dollar, leading to more U.S. exports and fewer imports and a slowing of inflation.
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.
Fiscal and monetary policies are frequently used together to restore an economy to full employment output. For example, suppose an economy is experiencing a severe recession. One possible solution would be to engage in expansionary fiscal policy to increase aggregate demand.
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.
