Contractionary fiscal policy is when the government _____ .

Contractionary fiscal policy refers to actions taken by the government to reduce overall demand in the economy, aimed at curbing inflation or stabilizing an overheating economy. The correct choice involves cutting government spending and increasing taxes. By cutting spending, the government directly reduces its expenditures in the economy, which lowers aggregate demand. Increasing taxes takes disposable income away from consumers, further dampening consumption and investment, thus leading to a decrease in overall economic activity.

This combination of measures is intended to slow down economic growth and keep inflation in check, making it a critical tool for managing economic stability. The other options either suggest increasing fiscal activity or maintaining current levels, which do not align with the aims of contractionary fiscal policy.