Question

What actions can the government take if it has a contractionary fiscal policy? How do these actions help to reduce inflation?

Answer 1

decreasing government spending, increasing tax revenue, or a combination of the two.

When a government put a contrationary fiscal policy in place, this generally reduce the amount of money that is available for the businesses and the consumers in the economy to spend. Contractionary fiscal policy is usually implemented when the demand for goods and services in an economy is very high to the extent of putting increasing pressure on wages and prices thus causing inflation. Reducing the money supply to the economy through fiscal policy will reduce demand and this will bring down the prices of goods and services, thus reducing inflation.

Answer 2

1. Contractionary fiscal policy is put in place when a government REDUCES ITS SPENDING OR RAISES TAXES OR DO BOTH. This type of policy reduces the amount of money that is flowing in an economy. The principal goal of a contractionary fiscal policy is to reduce growth to an economic level that is considered healthy by removing money from the economy.
2. When a government put a contrationary fiscal policy in place, this generally reduce the amount of money that is available for the businesses and the consumers in the economy to spend. Contractionary fiscal policy is usually implemented when the demand for goods and services in an economy is very high to the extent of putting increasing pressure on wages and prices thus causing inflation. Reducing the money supply to the economy through fiscal policy will reduce demand and this will bring down the prices of goods and services, thus reducing inflation.