Question

What is a contractionary fiscal policy? When would an economy ever pursue a contractionary fiscal policy? When was the last time the US government pursued a contractionary fiscal policy? What did it do? What was the result.

Answer 1

Answer: Contractionary Fiscal Policy is defined as the macroeconomic tools ,which is being used to reduce the rate of monetary expansion by putting some limits on the flow of money in the economy.

This policy being used when level of extreme inflation persists in the economy and increased level of capital investment results due to previous expansionary policy.

Tools which are being used during Contractionary Fiscal Policy are :

1.Government increase Taxes or/and

2.Government decrease Spending

By doing this government reduces the money flow in the economy hence in turn reduce the amount of money available for businesses and individuals.

The last time US government used the contractionary fiscal policy was before 2007-08 financial crisis, in order to ensure the sustainable fiscal growth.

Government via implementation of CFP :

1.Increases the taxes : to regulate the demand side of economy.

2.Reduces government spending in order to limit the money flow in the economy.

Hope it helped.