Suppose the Economy Is Initially in Equilibrium at Point a in the Figure

question 43

Multiple Choice

Suppose the economy is initially in equilibrium at point A in the figure below. A decrease in investment expenditures causes the AD curve to shift back to AD₂. Under these circumstances, which of the following statements is true?

• A) If the countercyclical fiscal policy is made at the correct time, the AD curve will shift to AD₄.
• B) If there is no countercyclical fiscal policy, the AD curve will shift to AD₄.
• C) If there is no countercyclical fiscal policy, the AD curve will shift back to AD₁.
• D) If the countercyclical fiscal policy is timely enough, the AD curve will shift to AD₃.
• E) If there is no countercyclical fiscal policy, the IA line will shift up.

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