Suppose that consumer spending is expected to decrease in the near future. If output is at potential output, which of the following policies is most appropriate according to the AS/AD model?
A)An increase in government spending
B)An increase in taxes
C)A reduction in government spending
D)No change in taxes or government spending

Question

Quizplus · Accepted Answer

When consumer spending is expected to decrease, this would lead to a decrease in aggregate demand. To counteract this and keep the economy at potential output, an increase in government spending (A) can help by boosting aggregate demand, according to the AS/AD (Aggregate Supply/Aggregate Demand) model.

Suppose That Consumer Spending Is Expected to Decrease in the near Future