What is a key characteristic of contractionary fiscal policy?

Contractionary fiscal policy is designed to decrease aggregate demand in an economy, particularly during periods of high inflation. A central aspect of this approach is increasing taxes, which typically leads to consumers and businesses having less disposable income. As people spend less, overall demand decreases, which can help reduce upward pressure on prices and control inflation.

In this context, increasing taxes serves a dual purpose: it limits consumer spending while simultaneously increasing government revenue, which can help to decrease budget deficits or pay down national debt. This careful balance is crucial in managing the economy, especially when inflation rates are high and there is a need to stabilize prices.

Other options presented fall outside the definition of contractionary fiscal policy. For instance, stimulating economic growth and encouraging consumer spending are consistent with expansionary policies, which aim to boost aggregate demand rather than reduce it. Maximizing government contracts for businesses does not specifically address the broader fiscal strategy of reducing inflation, which is the primary goal of contractionary fiscal policy.