Consider the following figure. 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 long-run aggregate supply 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 

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