In the context of expansionary and contractionary fiscal policy, the intent of contractionary fiscal policy is to:

• A. Raise long-run potential output by improving productivity through supply-side reforms
• B. Increase aggregate demand to raise real output and reduce unemployment during a recession
• C. Reduce aggregate demand to slow an overheated economy and reduce inflationary pressures
• D. Increase the money supply to lower interest rates and stimulate private investment

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the purpose of fiscal policy, which involves government decisions on taxation and spending to influence the economy.
2. Step 2: Differentiate between expansionary and contractionary fiscal policy. Expansionary policy aims to increase aggregate demand, often used during recessions to boost output and reduce unemployment.
3. Step 3: Recognize that contractionary fiscal policy is designed to reduce aggregate demand, typically by decreasing government spending or increasing taxes.
4. Step 4: Connect the goal of contractionary fiscal policy to slowing down an overheated economy, which helps reduce inflationary pressures by cooling demand.
5. Step 5: Note that contractionary fiscal policy does not directly aim to raise long-run potential output or increase the money supply; those are related to supply-side reforms and monetary policy, respectively.