The long-run effect of a decrease in government purchases can be described as the period of time when
A)the inflation adjustment line intersects the aggregate demand curve at the level of potential GDP.
B)firms are adjusting their prices and inflation is increasing to its new level.
C)real GDP is below potential GDP.
D)there is no spending balance.
E)firms are adjusting their prices and inflation is decreasing to its new level.

Question

Quizplus · Accepted Answer

In the long run, the economy adjusts to changes in government purchases and returns to its potential GDP, where the inflation adjustment line intersects the aggregate demand curve at the level of potential GDP. This reflects the economy's natural adjustment process to achieve a new equilibrium at full employment.

The Long-Run Effect of a Decrease in Government Purchases Can