-Refer to the graph above to answer this question.Suppose this economy is initially at Y₁ with budget line BL₁.If counter-cyclical fiscal policy is used which of the following is correct? A)Aggregate demand would increase from AD₁ to AD₂ and the budget surplus would increase from ab to cd. B)Aggregate demand would increase from AD₁ to AD₂ and the budget deficit would increase from ab to cd. C)Aggregate demand would decrease from AD₂ to AD₁ and the budget surplus would increase from cd to ab. D)Aggregate demand would decrease from AD₂ to AD₁ and the budget surplus would decrease from cd to ab. E)Aggregate demand would decrease from AD₂ to AD₁ and the budget deficit would decrease from cd to ab.

Question

Quizplus · Accepted Answer

Counter-cyclical fiscal policy aims to counteract economic downturns and upswings through government spending and taxation policies. In a downturn, it typically involves increasing government spending or decreasing taxes to boost aggregate demand. Therefore, if counter-cyclical fiscal policy is used when the economy is at a certain point, aggregate demand would increase. This increase in government spending or decrease in taxes, however, would likely lead to an increase in the budget deficit, not the surplus, because the government would be spending more than it collects in taxes or reducing its tax revenue.

-Refer to the Graph Above to Answer This Question