Use the following to answer questions:
-(Figure: Fiscal Policy Options)Refer to Figure: Fiscal Policy Options.If the aggregate demand curve is AD' ,the most appropriate discretionary fiscal policy is to _____ government transfer payments and _____ income tax rates.
A) decrease;increase
B) decrease;decrease
C) increase;increase
D) increase;decrease

Question

Use the following to answer questions: 
-(Figure: Fiscal Policy Options)Refer to Figure: Fiscal Policy Options.If the aggregate demand curve is AD' ,the most appropriate discretionary fiscal policy is to _____ government transfer payments and _____ income tax rates.
A) decrease;increase 
B) decrease;decrease 
C) increase;increase 
D) increase;decrease

Quizplus · Accepted Answer

The aggregate demand curve (AD) has shifted to the right, resulting in an increase in both real GDP and price level. To bring both variables back to their potential equilibrium, the government should decrease transfer payments and increase income tax rates, which will reduce disposable income and aggregate demand. This will shift the AD curve back to the left and decrease both real GDP and the price level.

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