Final answer:
In contractionary fiscal policy, economic output declines further. This policy aims to decrease aggregate demand, which leads to a decline in economic output.
Step-by-step explanation:
In contractionary fiscal policy, economic output declines further. This is because contractionary fiscal policy involves reducing government spending and increasing taxes, which has a negative impact on aggregate demand and economic activity.
A) Interest rates decrease is incorrect because contractionary fiscal policy is more focused on reducing government spending and increasing taxes, rather than manipulating interest rates.
B) The money supply increases is incorrect because contractionary fiscal policy typically involves reducing government spending, which would lead to a decrease in the money supply.
C) Economic output declines further is the correct answer because contractionary fiscal policy aims to decrease aggregate demand, which leads to a decline in economic output.
D) Economic output and spending decrease is partially correct because contractionary fiscal policy does lead to a decrease in economic output, but it doesn't necessarily mean a decrease in overall spending as it depends on the specific changes in government spending and taxes.