Contractionary Fiscal Policy:
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What happens when taxes increase?
Households have less disposal income to spend. Lower disposal income decreases consumption. An increase in taxes also reduces profits available to businesses and they cut down their investment expenditures. Consumption and private investment are part of GDP, so GDP falls as a result. However, this fall is magnified by the multiplier effect
What is contractionary fiscal policy?
Increasing taxes Decreasing Government spending
When to use it?
When inflation is high
