Answer to Question #86941 in Macroeconomics for vierginie

Question

effect of contrationary fiscal policy on economic activity

Answer 1

Contractionary fiscal policy generally reduces total output. Since taxes increase, the government's balance sheet shows more revenue. Moreover, spending cut is contractionary because it reduces government expenditures and slows production. Therefore, taxes increasing causes to reduce private consumption just as spending cuts reduce government consumption. At the same time, in the credit market private activity tends to increase.