Considering only its direct effect on income, contractionary fiscal policy tends to:
A)increase income and imports, lowering the trade deficit.
B)increase income and imports, raising the trade deficit.
C)decrease income and imports, lowering the trade deficit.
D)decrease income and imports, raising the trade deficit.

Question

Quizplus · Accepted Answer

Contractionary fiscal policy, which involves reducing government spending or increasing taxes, tends to decrease income. This, in turn, leads to a decrease in imports because people and businesses have less money to spend on foreign goods. As imports decrease, the trade deficit (the amount by which the cost of a country's imports exceeds the value of its exports) is likely to lower.

Considering Only Its Direct Effect on Income, Contractionary Fiscal Policy