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Select all that applyWhich of the following fiscal policy changes would make AD shift in the direction indicated in the figure?Multiple select question.A decrease in government spendingAn increase in government spendingA decrease in taxesAn increase in taxes

Question

Select all that applyWhich of the following fiscal policy changes would make AD shift in the direction indicated in the figure?Multiple select question.A decrease in government spendingAn increase in government spendingA decrease in taxesAn increase in taxes

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Solution

The Aggregate Demand (AD) curve shows the quantity of all goods demanded in the economy at different price levels. A rightward shift in the AD curve can be caused by a number of factors, including changes in fiscal policy like government spending and taxes.

  1. A decrease in government spending: This would actually cause the AD curve to shift to the left, not the right, because government spending is a component of AD. When government spending decreases, all else being equal, it reduces the total demand for goods and services.

  2. An increase in government spending: This would cause the AD curve to shift to the right. When the government increases its spending, it is increasing the total demand for goods and services in the economy.

  3. A decrease in taxes: This would cause the AD curve to shift to the right. When taxes decrease, consumers have more disposable income. This increase in disposable income can lead to an increase in consumption spending, which would increase AD.

  4. An increase in taxes: This would cause the AD curve to shift to the left, not the right. When taxes increase, consumers have less disposable income. This decrease in disposable income can lead to a decrease in consumption spending, which would decrease AD.

So, the fiscal policy changes that would make AD shift in the direction indicated in the figure (assuming the shift is to the right) are an increase in government spending and a decrease in taxes.

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