-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

The movement from AD1 to AD2 and then back to AD3 illustrates the partial crowding-out effect, where the initial increase in aggregate demand due to a tax cut is partially offset by subsequent decreases in spending or investment, not a complete negation of the fiscal stimulus.

-Refer to the Above Figure