Question

Which combination of fiscal policy actions would be most contractionary for an economy experiencing severe demand-pull inflation? 
A. Increase taxes and government spending
B. Decrease taxes and government spending
C. Increase taxes and decrease government spending
D. Decrease taxes and increase government spending

Answer 1

Step-by-step explanation:

C) Increase taxes and decrease government spending

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Answer 2

The correct answer is option C.

Explanation:

Contractionary policy is used to reduce fluctuations in the economy. It leads to a reduction in the economic variables.

Contractionary policy is used to curb inflation in the economy.

The main tools of contractionary fiscal policy are government spending and taxes.

The most contractionary policy is an increase in taxes and reduction in government spending. Both will lead to a reduction in disposable income. Thus reducing demand and consequently price level.