a) Contractionary fiscal policy is a policy that reduces government spending and/or increases taxes in order to reduce aggregate demand. This policy is used to reduce inflation and slow economic growth. Expansionary fiscal policy is a policy that increases government spending and/or decreases taxes in order to increase aggregate demand. This policy is used to stimulate economic growth and reduce unemployment.
b) Contractionary fiscal policy reduces consumption by reducing disposable income and increasing taxes. Expansionary fiscal policy increases consumption by increasing disposable income and decreasing taxes.
