Contractionary fiscal policy slows economic activity via reduced spending or higher taxes

Steps:

• Fiscal policy involves government spending and taxation to influence the economy.
• Contractionary fiscal policy aims to decrease aggregate demand to curb inflation or overheating.
• A budget surplus occurs when revenues exceed spending, withdrawing money from circulation.
• This reduces economic activity, fitting contractionary goals.

Why B is correct:

• By definition, contractionary fiscal policy increases budget surpluses through higher taxes or lower spending, reducing aggregate demand per Keynesian economics.

Why the others are wrong:

• A: Increasing the budget deficit boosts spending or cuts taxes, expanding the economy (expansionary policy).
• C: Raising interest rates is a tool of monetary policy, controlled by central banks, not fiscal policy.
• D: Increasing the money supply is expansionary monetary policy, not fiscal.

Final answer: B