Consider the figure below. Suppose that there’s a rise in v

→ due to business optimism—what Keynes called the “animal spirits” of investors.

This pushes us to AD(2). If the government’s goal is to keep output close to the Solow growth rate, and if fiscal policy is the tool that the government wants to use, what should it do?

Choose one of

a, b,

c, or d.

a. A rise in taxes OR a rise in government spending

b. A rise in taxes OR a fall in government spending

c. A fall in taxes OR a rise in government spending

d. A fall in taxes OR a fall in government spending.  mk6

Transcribed Image Text:

Inflation rate (TT) SRAS AD(1) AD(2) Solow growth Real GDP rate growth rate