Question

What does the government do in a contractionary fiscal policy for lowering inflation?
1. Reduce the quantum of money by decreasing taxes and increasing spending
2. Increase the quantum of money by raising taxes and reducing spending
3. Increase the quantum of money by decreasing taxes and increasing spending
4. Reduce the quantum of money by raising taxes and reducing spending

Answer 1

Correct Answer - Option 4 : Reduce the quantum of money by raising taxes and reducing spending

The correct answer is to Reduce the quantum of money by raising taxes and reducing spending.

• Contractionary monetary policy occurs when a nation's central bank raises interest rates and decreases the money supply.
  • It's done to prevent inflation.
• The long-term impact of inflation can be more damaging to the standard of living than a recession.
• Expansionary monetary policy boosts economic growth by lowering interest rates.
  • It's effective in adding more liquidity in a recession.

• The benefit of monetary policy is that it works faster than fiscal policy.
• The Federal Reserve votes to raise or lower rates at its regular Federal Open Market Committee meeting.
• It takes about six months for the added liquidity to work its way through the economy.