Contractionary Fiscal Policy vs Contractionary Monetary Policy

Contractionary fiscal policy is a decrease in government spending or an increase in taxes used to reduce aggregate demand and fight inflation.

It shifts aggregate demand left, lowering the price level and real GDP and moving the budget toward surplus. It is used to close an inflationary gap. Political resistance often makes spending cuts and tax increases hard to enact.

Contractionary monetary policy decreases the money supply to raise interest rates and reduce inflation.

The central bank sells bonds, raises the discount rate, or increases the reserve requirement. Higher interest rates reduce investment and consumption, shifting aggregate demand left. It is used to fight high inflation.