To show the effects of contractionary fiscal policy, we need to arrange the steps in the correct order:
1. Government increases the tax rate:
- By raising taxes, the government reduces the amount of disposable income in the hands of consumers and businesses.
2. Consumers have less money to spend:
- With higher taxes, consumers have less money available for spending, leading to a decrease in consumer demand for goods and services.
3. Inflationary pressure decreases:
- The reduction in consumer spending and demand for goods and services helps to alleviate inflationary pressure by slowing down the overall economy.
4. Producers manufacture fewer goods:
- As consumer demand decreases due to lower disposable income, producers respond by manufacturing fewer goods to align with the reduced demand in the market.
By following these steps in order, we can see how contractionary fiscal policy, which involves increasing taxes and reducing government spending, works to slow down economic growth, control inflation, and adjust consumer behavior in the economy.
