Question

Which of the following could be expected when the government applies a contractionary fiscal

policy? Contractionary fiscal policy involves increase in taxation and decrease in government spending.

[1] a decrease in the tax rate

[2] a decrease in the interest rate

[3] an increase in government spending

[4] a decrease in the budget deficit…….revenue from taxation increases and gvt spending decreases resulting in decrease in deficit

Answer 1

[4] a decrease in the budget deficit…….revenue from taxation increases and gvt spending decreases resulting in decrease in deficit.

This is because governments spends beyond their tax-based budgetary constraints by borrowing money from the private sector.