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    Question

    Which of the following fiscal measures will have the

    most expansionary effect on aggregate demand?
    A Increase in direct taxes Correct Answer Incorrect Answer
    B Decrease in indirect taxes Correct Answer Incorrect Answer
    C Reduction in government spending Correct Answer Incorrect Answer
    D Increase in fiscal deficit Correct Answer Incorrect Answer
    E Surplus in the primary balance Correct Answer Incorrect Answer

    Solution

    An increase in fiscal deficit (more government expenditure than revenue) injects demand into the economy → expansionary effect.

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