Contractionary fiscal and monetary policy are two types of policies used by the government to influence the overall level of economic activity. The intended goal of contractionary fiscal and monetary policy is to decrease the level of aggregate demand, which would help in reducing inflationary pressures.The primary tool used by the government to implement contractionary fiscal policy is changes in taxation and government spending. An increase in taxation or a decrease in government spending can be used to reduce the level of aggregate demand. In the case of an increase in taxation, people will have less disposable income, which will result in a decrease in consumption spending. Similarly, if the government reduces its spending, then businesses will also have less revenue to invest in capital, leading to a decrease in aggregate demand. Monetary policy on the other hand, is primarily controlled by the central bank of a country. It uses interest rates and other monetary tools to regulate the supply of money in the economy. If the central bank wants to decrease the level of aggregate demand, it can increase interest rates, making it more expensive for people to borrow and spend. Similarly, if it wants to increase the level of aggregate demand, it can reduce interest rates, making borrowing and spending more accessible.Contractionary fiscal and monetary policy are essential tools used by governments worldwide to control inflation and regulate the economy. The intended goal is to decrease the level of aggregate demand, which would help in reducing inflationary pressures and maintaining overall economic stability.
Know more about Contractionary fiscal here: