Figure 32-2
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Suppose that Figure 32-2 shows the effects of reducing the budget deficit by raising taxes. If authorities do not want real GDP to fall, monetary policy must
A. become sufficiently more expansionary to restore the aggregate demand curve to D0D0.
B. contract aggregate demand to be consistent with deficit-reducing fiscal policy.
C. not lower interest rates and thwart the goal of a balanced budget.
D. become more contractionary to lower the interest rate and spur investment.
Answer: A
Economics
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