Use the following to answer questions:
-(Figure: Fiscal Policy Options) Refer to Figure: Fiscal Policy Options. If the aggregate demand curve is ADʺ, the most appropriate discretionary fiscal policy is to _____ government spending and _____ income tax rates.
A) increase; decrease
B) increase; increase
C) decrease; decrease
D) decrease; increase

Question

Use the following to answer questions: 
-(Figure: Fiscal Policy Options) Refer to Figure: Fiscal Policy Options. If the aggregate demand curve is ADʺ, the most appropriate discretionary fiscal policy is to _____ government spending and _____ income tax rates.
A) increase; decrease 
B) increase; increase 
C) decrease; decrease 
D) decrease; increase

Quizplus · Accepted Answer

With an ADʺ curve, the economy is experiencing inflationary pressure due to excessive demand. To counter this, the government should decrease government spending and increase income tax rates. Decreasing government spending reduces overall demand in the economy, while increasing income tax rates reduces disposable income and therefore reduces consumer spending. Together, these policies should slow down demand and help reduce inflationary pressures.

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