Contractionary Fiscal Policy

Definition

Contractionary fiscal policy refers to government actions aimed at reducing aggregate demand and controlling inflation during periods of high economic activity. It involves decreasing government spending, increasing taxes, or both.

Related terms

Inflation: Inflation refers to a sustained increase in the general price level of goods and services over time. It erodes purchasing power and reduces the value of money.

Crowding Out Effect: The crowding out effect occurs when increased government borrowing leads to higher interest rates, which reduces private investment spending. This happens because there is limited borrowing capacity within an economy.

Monetary Policy: Monetary policy refers to actions taken by a central bank (such as the Federal Reserve) to manage the money supply and influence interest rates with the goal of promoting stable economic growth and low inflation.