Which of the following might be considered the most contractionary set of fiscal policies?
A)increase in government purchases,increase in taxes,and decrease in transfer payments
B)decrease in government purchases,increase in taxes,and decrease in transfer payments
C)increase in government purchases,decrease in taxes,and increase in transfer payments
D)increase in government purchases,increase in taxes,and increase in transfer payments
E)decrease in government purchases,decrease in taxes,and decrease in transfer payments

Question

Quizplus · Accepted Answer

The set of policies that would be considered most contractionary would be those that decrease aggregate demand. Option B is the correct answer because it involves a decrease in government purchases, an increase in taxes, and a decrease in transfer payments. These policies would reduce government spending, decrease disposable income for individuals and decrease overall consumption. Thus, this set of policies would lead to a decrease in aggregate demand and overall economic activity in the short run.

Which of the Following Might Be Considered the Most Contractionary