Contractionary Fiscal Policy: Definition, Effects, and Examples

Question 1

What is the primary goal of implementing a contractionary fiscal policy?

Accepted Answer

Reduce aggregate demand to control inflation

Answer

Increase government spending to boost economic growth

Answer

Increase unemployment to slow down the economy

Question 2

What is the main purpose of contractionary fiscal policy?

Accepted Answer

Lower inflation

Answer

Boost economic growth

Answer

Raise unemployment

Answer

Increase government spending

Question 3

Which scenario is contractionary fiscal policy more effective in addressing: curbing high inflation or stimulating economic growth during a recession?

Accepted Answer

More effective in curbing high inflation

Answer

Equally effective in both scenarios

Answer

More effective in stimulating economic growth during a recession

Question 4

Which combination of government spending and taxation changes best describes contractionary fiscal policy?

Accepted Answer

Government spending decreases, and taxation increases.

Answer

Government spending increases, and taxation decreases.

Answer

Government spending decreases, and taxation remains unchanged.

Answer

Government spending increases, and taxation increases.

Question 5

What is the main goal of contractionary fiscal policy?

Accepted Answer

To lower inflation

Answer

To boost economic growth

Answer

To create more jobs

Answer

To increase the government's budget deficit

Question 6

Which of the following is the primary objective of contractionary fiscal policy?

Accepted Answer

To reduce inflation by decreasing aggregate demand

Answer

To reduce unemployment

Answer

To increase investment

Answer

To stimulate economic growth

Question 7

What is the immediate effect of reducing government spending as part of a contractionary fiscal policy?

Accepted Answer

Decrease in aggregate demand

Answer

Increase in interest rates

Answer

Increase in investment

Answer

Appreciation of the exchange rate

Question 8

How does contractionary fiscal policy generally impact consumer spending?

Accepted Answer

Decreases it

Answer

Has no effect on it

Answer

Depends on the price elasticity of demand

Answer

Increases it

Question 9

What is the potential impact of contractionary fiscal policy on the unemployment rate?

Accepted Answer

Increase

Answer

Decrease

Answer

Depends on the labor market conditions

Answer

No change

Question 10

What is a possible rationale for implementing contractionary fiscal policy during an economic expansion?

Accepted Answer

To prevent overheating and excessive inflation

Answer

To stimulate economic growth

Answer

To improve the balance of payments

Answer

To reduce unemployment

Question 11

Which of the following is a potential benefit of contractionary fiscal policy?

Accepted Answer

Stabilizing the economy during inflationary periods

Answer

Stimulating economic growth in recessions

Answer

Reducing income inequality

Answer

Improving the balance of payments in the short run

Question 12

What is a potential drawback of contractionary fiscal policy?

Accepted Answer

May reduce the provision of government services

Answer

Has no impact on interest rates

Answer

Always effective in reducing inflation

Question 13

In which economic scenario would contractionary fiscal policy be most suitable?

Accepted Answer

Economy experiencing high inflation and strong economic growth

Answer

Economy experiencing high unemployment and weak economic growth

Answer

Economy experiencing low inflation and weak economic growth

Question 14

Which of the following is the main purpose of contractionary fiscal policy?

Accepted Answer

Reduce inflation

Answer

Accelerate economic growth

Answer

Increase employment

Answer

Stimulate investment

Question 15

Which of the following is a common instrument used to implement contractionary fiscal policy?

Accepted Answer

Tax increases

Answer

Quantitative easing

Answer

Interest rate cuts

Answer

Fiscal stimulus

Question 16

What is a potential short-term negative consequence of contractionary fiscal policy?

Accepted Answer

Increased unemployment

Answer

Lower inflation

Answer

Higher consumer spending

Answer

Improved trade balance

Question 17

Which of the following is a potential long-term benefit of contractionary fiscal policy?

Accepted Answer

Reduced inflation

Answer

Increased government debt

Answer

Lower economic growth

Question 18

How might contractionary fiscal policy affect interest rates?

Accepted Answer

Increase them

Answer

Decrease them

Answer

Always reduce them

Answer

Have no impact on them

Question 19

When is contractionary fiscal policy most likely to be implemented?

Accepted Answer

When inflation is persistently high

Answer

When unemployment is high

Answer

When economic growth is slow

Answer

When exports are increasing

Question 20

Which of the following is NOT a potential criticism of contractionary fiscal policy?

Accepted Answer

It is always effective

Answer

It can increase economic inequality

Answer

It can slow economic growth

Answer

It can require cuts in government spending

Question 21

How does contractionary fiscal policy differ from monetary policy?

Accepted Answer

It involves changes in government spending and taxation

Answer

It involves interest rates and money supply

Answer

It is more effective in the short run

Answer

Its effects are more long-lasting

Question 22

In a scenario of persistent high inflation, which of the following is a potential risk of contractionary fiscal policy?

Accepted Answer

Stagflation

Answer

Hyperinflation

Answer

Deflation

Answer

Economic boom

Question 23

The primary goal of contractionary fiscal policy is to:

Accepted Answer

Reduce inflation

Answer

Boost economic growth

Answer

Increase unemployment (while not the intended outcome, it can be a side effect)

Answer

Stabilize exchange rates

Question 24

Contractionary fiscal policy is most appropriate when the economy is experiencing:

Accepted Answer

High inflation

Answer

Deflation

Answer

Stagnant growth

Answer

High unemployment

Question 25

How does contractionary fiscal policy typically affect aggregate demand?

Accepted Answer

Decreases aggregate demand

Answer

Has no effect on aggregate demand

Answer

Increases aggregate demand

Question 26

A potential drawback of contractionary fiscal policy is:

Accepted Answer

Slower economic growth

Answer

Lower inflation (this is the intended outcome)

Answer

Increased consumer confidence (contractionary policy would likely decrease confidence)

Answer

Reduced budget deficit (this is a goal, not a disadvantage)

Question 27

Which of the following policies often works in conjunction with contractionary fiscal policy to control inflation?

Accepted Answer

Monetary policy

Answer

Trade policy

Answer

Foreign exchange policy

Answer

Industrial policy

Question 28

A government is less likely to implement contractionary fiscal policy when:

Accepted Answer

The economy is in a recession

Answer

Inflation is persistently high

Answer

The central bank is raising interest rates (this actually supports contractionary fiscal policy)

Answer

There is a large government budget deficit

Question 29

Which of the following indicators suggests contractionary fiscal policy is working as intended?

Accepted Answer

A decrease in consumer spending

Answer

An increase in investment (contractionary policy would likely reduce investment)

Answer

A rise in the unemployment rate (this is a potential side effect, not an indicator of success)