CFA Practice Question

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CFA Practice Question

During the Vietnam War, President Lyndon Johnson increased government expenditures while raising taxes. As a result, ______

A. the AD curve likely shifted to the left.
B. the AD curve likely shifted to the right.
C. what happened to the AD curve is unclear.
Correct Answer: C

An increase in government expenditures shifts the AD curve to the right while an increase in taxes shifts it to the left. Depending on the relative shifts, the AD curve could shift to the left, to the right, or not at all.

User Contributed Comments 6

User Comment
sharon Watch out for B
Done Why couldn't be not changed?
moma20 because he does not specify avalue
anricus But surely because of the multiplier effect! AD would increase because of government expenditure and subsequent multiplier effect than taxation effect?
MattyBo Tricky. No mention of relative change so the outcome is unclear.
jayj001 increasing taxes is contractionary whilst increasing government spending is expansionary - pulling against each other so unclear as to AD effect
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