Question

Refer to the accompanying graph. What combination would most likely cause a shift from d1 to d2?

Multiple Choice
-an increase in taxes and an increase in government spending
-a decrease in taxes and an increase in government spending
-an increase in taxes and no change in government spending

Answer 1

The combination of factors that will most likely cause a shift from AD₁ to AD₂ is "a decrease in taxes and an increase in government spending" (Option B)

A shift from AD₁ to AD₂ is likely with a decrease in taxes and an increase in government spending.

This reflects expansionary fiscal policy, stimulating aggregate demand (AD) in the economy. Lower taxes boost consumer disposable income, encouraging spending, while increased government spending injects funds directly into the economy.

Both actions spur consumption and investment, driving economic activity. Consequently, the aggregate demand curve shifts rightward from AD₁ to AD₂, illustrating the potential impact of fiscal policy on economic output and employment.

This scenario is associated with efforts to counter economic downturns or recessions.

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