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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 β†’ expansionary effect.

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