Macroland's government reduces taxes in an effort to move its economy back to its natural rate of output. According to the AS/AD model, the tax reduction will:
A) stimulate aggregate demand and help resolve a short-run recession.
B) stimulate long-run aggregate supply to reduce inflation.
C) control government spending to reduce inflationary pressures.
D) reduce consumer spending and increase savings, which will resolve a recession.

Question

Quizplus · Accepted Answer

Tax reductions increase disposable income for consumers and businesses, leading to increased spending and investment. This stimulates aggregate demand, which can help an economy recover from a recession according to the Aggregate Supply/Aggregate Demand (AS/AD) model.

Macroland's Government Reduces Taxes in an Effort to Move Its