Question

Government action during expansionary fiscal policy would involve ________, whereas contractionary fiscal policy would involve ________.

A) increasing the money supply; increasing personal income taxes

B) increasing corporate income taxes; raising interest rates

C) increasing transfer payments; increasing corporate income taxes

D) increasing government purchases; increasing transfer payments

Answer 1

Expansionary Fiscal Policy includes the actions taken by government to increase the aggregate income in the economy ( In terms of graphs, by increasing aggregate demand by moving IS curve to the right). Conversely, Contractionary Fiscal Policy includes action taken by government to decrease the aggregate income in the economy (equivalent to decreasing aggregate demand by moving IS curve to the left).

So, the correct option is C.

When government increases transfer payments, aggregate demand and hence aggregate income increases and hence, it is used as an expansionary fiscal policy tool.

Whereas, when government increases corporate income taxes, aggregate demand and income reduce, and hence, it is contractionary fiscal policy tool.