Explanation:

Contractionary Fiscal Policy :

Fiscal policy refers to a government’s spending and taxing habits. There are two kinds of fi scal policy direction: contractionary and expansionary.

Contractionary policy directly reduces government de fi cits or increases surpluses. Expansionary policy involves activity that directly increases de fi cits or reduces surpluses.

• After a tax increase, the government’s balance sheet shows more revenue. Similarly, a spending cut is contractionary because it reduces expenditures. According to standard measurements of gross domestic product (GDP), contractionary fiscal policy seemingly reduces total output. Taxes tend to reduce private consumption just as spending cuts reduce government consumption.
• Contractionary policy could allow for increased private activity in the credit market. This phenomenon is sometimes referred to in the literature as “crowding in.” A decrease in government borrowing could leave more money for private investments. Less pressure on interest rates means more room for small borrowers. In the long run, less government spending often means fewer taxes, further increasing the pool of available funds for private markets.