To maintain a fixed level of aggregate demand, a central bank would have to respond to a tax increase by
A)increasing reserve requirements for banks
B)restricting money supply
C)buying bonds in the open market
D)selling bonds in the open market
E)both A and B

Question

Quizplus · Accepted Answer

To maintain a fixed level of aggregate demand in the face of a tax increase, a central bank would likely buy bonds in the open market. This action, known as an open market purchase, injects money into the economy, lowering interest rates and stimulating borrowing and spending, which can help offset the contractionary effect of the tax increase.

To Maintain a Fixed Level of Aggregate Demand, a Central