While targeting the deficit, which of the following is likely to occur after a positive aggregate demand shock?
A) AD↑ ⇒ Y↓ ⇒ T↓ ⇒ deficit↑ ⇒ G↓ ⇒ AD↓ ⇒ Y↓
B) AD↑ ⇒ Y↓ ⇒ T↓ ⇒ deficit↓ ⇒ G↓ ⇒ AD↓ ⇒ Y↓
C) AD↓ ⇒ Y↓ ⇒ T↓ ⇒ deficit↑ ⇒ G↓ ⇒ AD↓ ⇒ Y↑
D) AD↑ ⇒ Y↑ ⇒ T↑ ⇒ deficit↓ ⇒ G↑ ⇒ AD↑ ⇒ Y↑

Question

Quizplus · Accepted Answer

A positive aggregate demand (AD) shock leads to an increase in output (Y) and, consequently, an increase in tax revenues (T), which can reduce the deficit. With a lower deficit, the government might increase spending (G), further boosting AD and Y.

While Targeting the Deficit, Which of the Following Is Likely