Suppose the economy's current AD and SRAS curves intersect to the right of Natural Real GDP.Keynesians might advise a policy of tax __________ to shift __________.
A) increases; SRAS to the left
B) increases; AD to the left
C) cuts; SRAS to the right
D) cuts; AD to the right

Question

Quizplus · Accepted Answer

Keynesians typically advocate for demand-side policies to manage economic fluctuations. If the AD and SRAS curves intersect to the right of Natural Real GDP, it indicates an overheated economy possibly leading to inflation. To cool down the economy and reduce inflationary pressures, Keynesians would likely recommend increasing taxes to decrease disposable income, thereby reducing consumption and shifting the Aggregate Demand (AD) curve to the left, towards the Natural Real GDP. This helps in stabilizing the economy by reducing inflation without directly affecting the short-run aggregate supply (SRAS).

Suppose the Economy's Current AD and SRAS Curves Intersect to the Right