The adverse impact of a negative aggregate demand shock is reduced when the government does not target the deficit because
A) targeting the deficit causes further negative aggregate demand shocks.
B) negative aggregate demand shocks do not affect the deficit.
C) the economy is always producing potential output.
D) not targeting the deficit causes positive aggregate demand shocks.

Question

Quizplus · Accepted Answer

When the government targets the deficit during a negative aggregate demand shock, it usually leads to decreased government spending, and/or increased taxes which further dampens aggregate demand, exacerbating the negative shock. By not targeting the deficit, the government can use expansionary fiscal policy measures, such as increased government spending or tax cuts, to counteract the negative shock and stimulate aggregate demand.

The Adverse Impact of a Negative Aggregate Demand Shock Is