Contractionary Fiscal Policy Effects

Steps:

• Increasing direct taxation reduces disposable income for households.
• Lower disposable income decreases consumption and aggregate demand (AD).
• Reduced AD slows economic growth and raises unemployment, hindering those objectives.
• Simultaneously, lower AD curbs demand-pull inflation, aiding price stability.

Why C is correct:

• C (less likely for growth, more likely for low inflation, less likely for low unemployment) aligns with AD shift leftward per Keynesian model.

Why the others are wrong:

• A ignores inflation control benefit from reduced AD.
• B wrongly suggests growth boost, opposite of contractionary policy.
• D incorrectly implies easier growth and inflation control simultaneously.

Final answer: C