Question

Which of the following fiscal policy action would cause the economy to contract?

a. raise taxes
c. decrease the money supply
b. increase government expenditures
d. balance the budget

Answer 1

This is a tricky question, because most of the answers provided are correct. For instance, by raising taxes, the government drops down the demand rates, as well as by decreasing the money supply (in that case, it also prevents economy from falling into an inflating situation). As for balancing the budget, this economical move entails decreasing the public expenditure and, therefore, contracting the demanding economical figures too.