Refer to the above figure. Suppose the economy is at E and the government uses an expansionary fiscal policy to move the aggregate demand curve to AD2. In the end, the aggregate demand curve is still AD1. A possible reason for this is that
A) the economy is already at full employment.
B) the increased borrowing causes higher interest rates, which encourage people to save more and increase investment spending due to the extra saving.
C) people increase saving because they anticipate higher future taxes, resulting in a reduction in current consumption spending that offsets the increased government spending.
D) some of the increased government spending is not counted in GDP.
Answer: C) people increase saving because they anticipate higher future taxes, resulting in a reduction in current consumption spending that offsets the increased government spending.
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