The effect of contractionary ﬁscal policy is shown as a
A) rightward shift in the economy's aggregate demand curve.
B) rightward shift in the economy's aggregate supply curve.
C) movement along an existing aggregate demand curve.
D) leftward shift in the economy's aggregate demand curve.

Question

Quizplus · Accepted Answer

Contractionary fiscal policy involves a decrease in government spending and/or an increase in taxes. This leads to a decrease in disposable income and a decrease in consumption spending, which results in a decrease in aggregate demand. Therefore, the effect of contractionary fiscal policy is a leftward shift in the economy's aggregate demand curve.

The Effect of Contractionary ﬁScal Policy Is Shown as a