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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

If the government wants to contract aggregate demand, it can _____ government purchases or _____ taxes.

a. increase, increase

b. increase, decrease

c. decrease, increase

d. decrease, decrease

To determine

Relation between government purchases, tax, and aggregate demand.

Explanation

Option (c):

When the government purchase is decreased or taxes are increased in the economy, the money supply curve shifts to the left causing a decrease in money supply. The higher taxes reduce consumption and investment, thereby contracting the aggregate demand. Thus, option ‘c’ is correct.

Option (a):

Increase in government purchases increases money supply, which leads to an increase in aggregate demand. Thus, option ‘a’ is incorrect...

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