If an Economy Is Above Potential Output and the Government

question 9

Multiple Choice

If an economy is above potential output and the government opts for a contractionary fiscal policy (running surpluses) to shift AD, an economist with a Classical view who holds the Ricardian equivalence theorem to be practically true would conclude that AD:

• A)shifts to the right due to lower government spending.
• B)shifts to the left due to lower government spending.
• C)does not shift since the lower government spending is offset by higher private consumption.
• D)does not shift since the lower government spending is offset by lower private consumption.

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