|Posted on April 17, 2014 at 12:00 AM|
From the Keynesian economic perspective, a contractionary fiscal policy is appropriate if the economy is experiencing inflation in the short run. The government can decrease spending and/or increase income taxes to shift aggregate demand to the left. This will decrease real GDP, decrease the price level, and increase the unemployment rate.
This No Bull Review video explains the concept of a contractionary fiscal policy and shows you how to graph the policy using the AD/AS model.
AP Macroeconomic Unit 3 AD/AS & Fiscal Policy