Contractionary fiscal policy is so named because it is aimed at reducing aggregate demand in the economy. This policy is typically employed by the government to combat inflation and stabilize the economy. By reducing government spending or increasing taxes, contractionary fiscal policy decreases the overall amount of money circulating in the economy.
When the government spends less or takes more money from the public through taxes, it effectively reduces the total demand for goods and services. This can lead to a decrease in inflation rates, but it may also slow down economic growth and increase unemployment in the short term. Therefore, while the name implies a contraction, it specifically refers to the contraction of demand rather than the contraction of the money supply or the size of the government itself.