What does the Government do in a contractionary fiscal policy? 

Key PointsContractionary fiscal policy is used to reduce inflation, slow economic growth, and control excessive demand in an economy.
It reduces the money supply in circulation, making borrowing expensive and limiting consumer and business spending.
The government achieves this by:
✔ Decreasing government spending → Reduces public expenditure and economic stimulus.
✔ Increasing taxes → Reduces disposable income, discouraging excessive consumption.
Effects of Contractionary Fiscal Policy:
Reduces aggregate demand, leading to lower inflation.
Increases government revenue but slows down economic growth.
Higher interest rates and reduced borrowing as people have less disposable income.
Prevents economic overheating and ensures long-term financial stability.
Important Points 
When is Contractionary Fiscal Policy Used?

When the economy is overheating and inflation is rising above acceptable levels.
When there is an unsustainable fiscal deficit that needs to be controlled.
When a government needs to stabilize the economy by reducing demand.
Examples of Contractionary Fiscal Policy:

U.S. 1980s: Federal Reserve raised interest rates and government spending was reduced to control inflation.
India 2019: Increase in corporate tax rates and reduction of public sector expenditure to reduce fiscal deficit.
Germany 2010s: Austerity measures, reducing public spending and increasing taxes.
Difference Between Expansionary and Contractionary Fiscal Policy:

Expansionary Policy → Increases government spending and reduces taxes (Used during recession).
Contractionary Policy → Decreases government spending and increases taxes (Used to control inflation).
Additional Information 
Contractionary Fiscal Policy vs. Contractionary Monetary Policy:

Fiscal Policy is controlled by the government through spending and taxation.
Monetary Policy is controlled by the Central Bank (RBI in India) by adjusting interest rates, reserve requirements, and liquidity in the banking system.
Impact on Different Sectors:

Businesses: Reduced consumer demand affects profits.
Households: Less disposable income due to higher taxes.
Investors: Higher interest rates discourage investment.
Government: Improves fiscal discipline but may slow economic growth.