Which of the following would constitute contractionary monetary policy by the Fed?

a. Open market sales of government securities, an increase in the discount rate, and an increase in reserve requirements

b. An increase in income tax rates, a cut in government spending, and an elimination of the investment tax credit

c. Open market purchases of government securities, a cut in the discount rate, and an increase in reserve requirements

d. An increase in tariffs on imported goods and a decrease in foreign aid

b. An increase in income tax rates, a cut in government spending, and an elimination of the investment tax credit

Explanation:

Contractuary fiscal policy is a form of financial policy that involves raising taxes, reducing government spending (expenditures), or fighting inflationary pressures. It will work when the inflationary gap happens on eh economy.

With the increase in taxes, households have less disposable income to spend. Low waste reduces consumption. Increasing taxes reduces the income that businesses can earn and reduces their investment costs. Consumption and private investment are part of Gross Domestic Product (GDP). However, this decline is enhanced by the multiplier effect.

Decreasing public expenditure is part of GDP directly reducing GDP (ie GDP = consumption + private investment + public spending + net exports). However, such a decline worsens as a result of consumption and other indirect components of GDP.