Contractionary ﬁscal policy is so named because it
A) involves a contraction of the nation's money supply.
B) necessarily reduces the size of government.
C) is aimed at reducing aggregate demand and thus achieving price stability.
D) is expressly designed to expand real GDP.

Question

Quizplus · Accepted Answer

Contractionary fiscal policy is aimed at reducing aggregate demand in order to achieve price stability. This is typically achieved through a decrease in government spending and/or an increase in taxes, which ultimately reduces overall spending in the economy. It is called "contractionary" because it contracts or reduces the overall level of economic activity, rather than expanding it (as expansionary fiscal policy would aim to do).

Contractionary ﬁScal Policy Is So Named Because It