Which of the following would be the theoretical outcome of contractionary fiscal

Question

Which of the following would be the theoretical outcome of contractionary fiscal policy in the following aggregate demand-aggregate supply model, where LRAS is long-run aggregate supply and SRAS is short-run aggregate supply? The aggregate demand (AD) curve would shift from AD_1 to AD_2. The AD curve would shift from AD_2 to AD_1. The short-run aggregate supply (SRAS) curve would shift from SRAS_2 to SRAS_1. The AD curve would shift from AD_1 to AD_2 at the same time that the SRAS curve would shift from SRAS_1 to SRAS_2. The SRAS curve would shift from SRAS_1 to SRAS_2.

Explanation / Answer

Ans: The aggregate demand(AD) curve would shift from AD1 to AD2.

Explanation:

Aggregate demand consists of consumption, investment, government spending, and net exports. The aggregate demand curve will shift as a result of changes in any of these components.

Contractionary policy involves a decrease in government spending, an increase in taxes, or a combination of the two. It leads to a left-ward shift in the aggregate demand curve.

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