Related to the Economics in Practice on p. 558: An earthquake destroyed 50% of the Moldovian manufacturing base. The Moldovian government decided to use a contractionary fiscal policy to counter the effects of the earthquake on the economy. The use of the contractionary fiscal policy would have caused
A) the price level to be lower and the output level to be higher than they would have been without the policy action.
B) both the price level and the output level to be higher than they would have been without the policy action.
C) both the price level and output level to be lower than what they would have been without the policy action.
D) the price level to be higher and the output level to be lower than they would have been without the policy action.

Question

Quizplus · Accepted Answer

Contractionary fiscal policy involves a decrease in government spending and/or an increase in taxes, which would decrease aggregate demand in the economy. Given that the manufacturing base has been destroyed, there will be a decrease in the supply of goods and services, leading to an increase in prices. Therefore, the use of contractionary fiscal policy would lead to both the price level and the output level being lower than what they would have been without the policy action.

Related to the Economics in Practice on P