-Refer to the above figure. Suppose the relevant aggregate demand curve is AD2. If the government wants to use discretionary fiscal policy to close the existing gap, it should
A) decrease taxes.
B) increase taxes.
C) increase the money supply.
D) decrease government spending.

Question

-Refer to the above figure. Suppose the relevant aggregate demand curve is AD2. If the government wants to use discretionary fiscal policy to close the existing gap, it should
A) decrease taxes. 
B) increase taxes. 
C) increase the money supply. 
D) decrease government spending.

Quizplus · Accepted Answer

To close the existing gap with the aggregate demand curve at AD2, the government should aim to increase aggregate demand. Decreasing taxes puts more money in the hands of consumers and businesses, encouraging spending and investment, which in turn increases aggregate demand.

-Refer to the Above Figure