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Anti-inflationary macroeconomic measures such as cutting government spending and raising taxes and interest rates are most likely to:
APush aggregate demand down and slow the economy
BPush aggregate demand up and fuel a boom
CLeave aggregate demand completely unchanged
DRaise employment while raising inflation
Answer & Solution
Correct answer: A. Push aggregate demand down and slow the economy
1. The chapter explains macroeconomic policies (monetary and fiscal) can cause cycles.
2. Expansionary policy (more spending, tax cuts) boosts demand and brings booms.
3. Anti-inflationary measures are the opposite: less spending, higher taxes and higher interest rates.
4. These put downward pressure on aggregate demand.
5. The economy slows, possibly into recession, so the correct choice is that demand is pushed down.
6. "Push demand up and fuel a boom" is ruled out: that describes expansionary, not anti-inflationary, policy.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 5 "Business Cycles", p.8_
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