Figure 32-2 -Suppose that Figure 32-2 shows the effects of reducing the budget deficit by raising taxes.If authorities do not want real GDP to fall, monetary policy must A)become sufficiently more expansionary to restore the aggregate demand curve to D₀D₀. B)contract aggregate demand to be consistent with deficit-reducing fiscal policy. C)not lower interest rates and thwart the goal of a balanced budget. D)become more contractionary to lower the interest rate and spur investment.

Question

Quizplus · Accepted Answer

If authorities want to prevent real GDP from falling despite the tax increase, they must offset the contractionary effect of the tax increase on aggregate demand by implementing expansionary monetary policy. This can be achieved by shifting the AD curve back to its original position (D₀) through monetary policy. Therefore, choice A is the correct answer. Choices B, C, and D are incorrect because they either call for contractionary monetary policy (B, D) or suggest a contradictory response (C) that would worsen the situation.

Figure 32-2 ​

Figure 32-2