What happens to the government's budget when contractionary policy is applied?

When contractionary policy is applied, the government's budget typically decreases the deficit. Contractionary policy often involves reducing government spending or increasing taxes, both of which have the effect of lowering the fiscal deficit. By cutting back on expenditures, the government is spending less money, which can lead to a reduction in the need for borrowing, hence decreasing the deficit. Similarly, increasing taxes can lead to higher revenue, which also contributes to a lower deficit.

In a macroeconomic context, contractionary policy is aimed at slowing down an overheating economy, controlling inflation, or stabilizing economic growth. While some policies may have other short-term impacts, the overarching effect is generally a reduced budget deficit as the government's fiscal position improves from decreased spending or increased revenue.