-Refer to the above figure. Suppose that the economy starts at AD₁. If the government reduces taxes, then the economy goes to AD₂, but then falls back to AD₃. This is an example of

Question

Quizplus · Accepted Answer

A reduction in taxes initially shifts the aggregate demand curve from AD₁ to AD₂. However, if the economy falls back to AD₃, it suggests that the initial increase in demand was partially offset by other factors, such as increased interest rates or reduced private spending, which is indicative of a partial crowding-out effect.

-Refer to the Above Figure