Final answer:
Contractionary fiscal policy consists of decreasing government spending and increasing taxes, which serves to lower aggregate demand, aiming to slow down an overheating economy and reduce inflationary pressures. Option number d is correct.
Step-by-step explanation:
The correct answer to what contractionary fiscal policy entails is: d. contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand. This strategy is utilized to dampen economic activity and curb inflation when the economy is overheating.
Contractionary fiscal policy involves reducing government expenditures on final goods and services, which decreases consumption, and increasing taxes, which reduces disposable income and investment spending. The aggregate demand/aggregate supply model helps policymakers decide when to apply contractionary fiscal policy.