"A drop in government expenditures lowered output in the short run, but left output unaffected in the long run." This statement implies that the price level __________ in the long run, causing the interest rate to __________.

Question

Quizplus · Accepted Answer

In the long run, the economy adjusts to changes in government expenditures through changes in the price level and interest rates. A drop in government expenditures would initially lower output, leading to a decrease in the demand for money, which in turn causes the price level to fall. As the price level falls, the real value of money increases, leading to lower interest rates. This adjustment process ensures that output returns to its natural level in the long run, unaffected by the initial drop in government expenditures.

"A Drop in Government Expenditures Lowered Output in the Short