Which of the following would not be considered pure contractionary fiscal policy? A. A cut in...

Which of the following would not be considered pure contractionary fiscal policy?

A. A cut in taxes matched by an equal cut in spending.

B. A cut in spending used to finance a cut in the money supply.

C. A cut in spending in order to buy back some outstanding government bonds.

D. A tax increase used to buy back some outstanding government bonds.

Expert Solution

A contractionary fiscal policy includes the increase in the tax rate or a reduction in the government spending and the main motive behind the contractionary fiscal policy is to provide the government enough funds to meet other monetary needs, therefore, on the basis of this definition, the right answer is option B, that is, a cut in spending used to finance a cut in the money supply, as money supply is controlled by the central bank of the economy and the government has no role in controlling the money supply.

Rahul Sunny answered 2 years ago

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