Fiscal Policy Impact on Aggregate Demand

Steps:

• Assume the shift from AD to AD' is rightward, indicating increased aggregate demand.
• Recall aggregate demand components: C + I + G + (X - M).
• Analyze fiscal policy: budget surplus is government revenue minus spending.
• A fall in surplus means higher G or lower taxes, boosting AD.

Why A is correct:

• A fall in budget surplus increases government spending or reduces taxes, directly raising the G component of AD per the AD formula.

Why the others are wrong:

• B: A fall in trade surplus (exports minus imports) decreases net exports, shifting AD left.
• C: A rise in imports increases M, reducing net exports and shifting AD left.
• D: A rise in interest rate discourages investment and consumption, shifting AD left.

Final answer: A