Figure 12-3 -Refer to Figure 12-3. If the Aggregate Demand Curve Is

question 73

Multiple Choice

Figure 12-3
-Refer to Figure 12-3. If the aggregate demand curve is AD₁, which of the following is the most Jappropriate discretionary fiscal policy to pursue?

• A) a contractionary fiscal policy involving reductions in government spending and increases in income tax rates
• B) a contractionary fiscal policy involving reductions in government spending and decreases in income tax rates
• C) an expansionary fiscal policy involving increases in government spending and increases in investment tax credits
• D) an expansionary fiscal policy involving increases in government spending and decreases in investment tax credits

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Definitions:

Optimal Output

The level of production at which a firm or economy can produce goods at the lowest average cost, maximizing efficiency.

Government

The system or group of people governing an organized community, often a state, and the mechanisms and institutions through which they rule.

Efficiency Loss

Efficiency loss, also known as deadweight loss, is the loss of economic efficiency that can occur when the equilibrium for a good or a service is not achieved or is not achievable.

Deadweight Loss

A loss in economic efficiency that occurs when the equilibrium for a good or service is not achieved, often due to market distortions like taxes or subsidies.