A) increase taxes and reduce government spending to shift the aggregate demand curve rightward to AD $\mathrm { AD } _ { 2 }$
B) reduce taxes on businesses to shift the aggregate supply curve leftward.
C) reduce taxes and increase government spending to shift the aggregate demand curve from $A D _ { 1 } \text { to } A D _ { 2 }$
D) do nothing since the economy appears to be achieving full-employment real GDP.

Question

A) increase taxes and reduce government spending to shift the aggregate demand curve rightward to AD $\mathrm { AD } _ { 2 }$ 
B) reduce taxes on businesses to shift the aggregate supply curve leftward. 
C) reduce taxes and increase government spending to shift the aggregate demand curve from $A D _ { 1 } \text { to } A D _ { 2 }$ 
D) do nothing since the economy appears to be achieving full-employment real GDP.

Quizplus · Accepted Answer

To increase the aggregate demand and stimulate economic growth, reducing taxes and increasing government spending is the most effective approach. This would shift the AD curve from AD1 to AD2. Option A would be counterproductive since reducing government spending would decrease aggregate demand, potentially leading to a recession. Option B would only benefit businesses and would not necessarily stimulate consumer spending or overall economic growth. Option D assumes that full-employment GDP is the only goal, whereas policymakers may aim for higher levels of GDP and lower unemployment.

A) Increase Taxes and Reduce Government Spending to Shift the Aggregate