Figure 32-2
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Assume that a contractionary monetary policy has shifted the aggregate demand curve in Figure 32-2 from D0D0 to D1D1. Fiscal authorities who wish to restore real GDP to the full-employment level will
A. run a budget surplus by increasing taxes or cutting government spending.
B. run a balanced budget to prevent the interest rate from rising and cutting off investment.
C. run a budget deficit by cutting taxes or increasing government spending.
D. ignore the change in monetary policy since it has no effect on fiscal policy.
Answer: C
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