-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 AD1. This is an example of

Question

Quizplus · Accepted Answer

The scenario described is an example of a complete crowding-out effect, where the initial increase in aggregate demand (AD) due to a tax cut (moving from AD1 to AD2) is entirely offset in the long run, bringing the economy back to its original state (AD1). This implies that any initial boost in economic activity from the government's fiscal policy is completely negated by subsequent economic adjustments, such as changes in interest rates or investment levels, leading to no net change in the aggregate demand.

-Refer to the Above Figure