Answer to Question #214125 in Economics for Paballo

Question

Which one of the following is correct regarding contractionary fiscal policy in the Keynesian 

model? It will…

[1] decrease inventories

[2] increase inventories

[3] increase investment

[4] decrease investment

Answer 1

Contractionary Fiscal Policy means reduction in government spending or increase in taxes. Such policy will increase inventories.

So, the correct answer is [2].