The correct answer is a. raise taxes to move to AD1.
If the aggregate demand curve is at AD1, the government should raise taxes to move to AD3. This is because a decrease in government spending will shift the aggregate demand curve to the left, which is the opposite of what the government wants to achieve.
Analysis of the other options:
b. cut taxes to move to AD3: This is incorrect because cutting taxes will shift the aggregate demand curve to the right, which will further increase the gap between AD1 and AD3.
c. cut spending to move to AD3: This is also incorrect because cutting spending will shift the aggregate demand curve to the left, which is the opposite of what the government wants to achieve.
d. not change its behavior: This is incorrect because the government should take action to move the economy closer to full employment.
e. cut taxes to move to AD3: This is a repetition of option b and is therefore incorrect.
Conclusion:
The only way for the government to move the aggregate demand curve from AD1 to AD3 is to raise taxes. This will decrease the disposable income of households and businesses, which will lead to a decrease in aggregate demand.
Complete question:
In exhibit 11-6 if the aggregate demand curve is at ad1 the government should:
a. raise taxes to move to AD1.
b. cut taxes to move to AD3.
c. cut spending to move to AD3.
d. not change its behavior.
e. cut taxes to move to AD3.