question and answer

AS-AD model:

Which one is the correct?

When gov. reduces deficits by increasing taxes…

  1. in the short run, output decreases, and in the medium run, output Returns to potential
  2. in the short run, Government expenditures increase and thus in the medium run, output increases
  3. in the short run, interest rate is higher, and in the medium run, the effect of consolidation Policy on Investment is not clear
  4. in the short run, IS curve shifts inward to the left and in the medium run, it shifts back to its original Position due to increase in investment
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