-In the above figure, if the economy is initially at point D and taxes are cut while potential GDP does not change, then the economy will
A) move to point C.
B) move to point A.
C) move to point B.
D) stay at point D.

Question

-In the above figure, if the economy is initially at point D and taxes are cut while potential GDP does not change, then the economy will
A) move to point C. 
B) move to point A. 
C) move to point B. 
D) stay at point D.

Quizplus · Accepted Answer

When taxes are cut, aggregate demand increases, shifting the AD curve to the right. Since potential GDP does not change, the economy will move to a point on the new AD curve that is at the same level of potential GDP. Point C is the only point on the new AD curve that is at the same level of potential GDP as point D.

-In the Above Figure, If the Economy Is Initially at Point