Figure: Aggregate Demand Shifts Refer to the figure. Suppose the economy is initially at point A in the diagram. If an increase in investment spending causes a shift of the AD curve from AD₁ to AD₄, then the government can avoid a short-run increase in inflation by: A) increasing taxes so that the AD curve shifts back to AD₁. B) increasing taxes so that the AD curve shifts further out to AD₅. C) increasing government spending so that the AD curve shifts back to AD₁. D) increasing government spending so that the AD curve shifts further out to AD₅.

Question

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The Answer of Figure: Aggregate Demand Shifts Refer to the figure. Suppose the economy is initially at point A in the diagram. If an increase in investment spending causes a shift of the AD curve from AD₁ to AD₄, then the government can avoid a short-run increase in inflation by: A) increasing taxes so that the AD curve shifts back to AD₁. B) increasing taxes so that the AD curve shifts further out to AD₅. C) increasing government spending so that the AD curve shifts back to AD₁. D) increasing government spending so that the AD curve shifts further out to AD₅.

Figure: Aggregate Demand Shifts Refer to the Figure