Suppose the economy has a recessionary gap. If supply-side effects are very strong in relation to the demand-side effects,
A) the impact of tax cuts will be strengthened because the increase in disposable income induces consumption, which in turn encourages firms to expand production, thereby shifting the short- run aggregate supply curve to the right.
B) the impact of tax cuts will be strengthened because in addition increasing aggregate demand, long-run and short-run aggregate supply will also increase.
C) the impact of increased transfer payments to help re-tool the unemployed with new skills will be strengthened, thereby shifting the aggregate demand curve further to the right.
D) the impact of increased transfer payments to help re-tool the unemployed with new skills will be strengthened, thereby shifting the short-run aggregate supply curve to the right.
Answer: B) the impact of tax cuts will be strengthened because in addition increasing aggregate demand, long-run and short-run aggregate supply will also increase.
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