Assume that the short- run AS is upward sloping. If the government chooses to reduce government expenditure or to increase taxes, according to the Aggregate Supply - Aggregate Demand model:

Question

Quizplus · Accepted Answer

If the government reduces government expenditure or increases taxes, it will decrease aggregate demand. With an upward sloping short-run AS curve, a decrease in aggregate demand will lead to a decrease in GDP and a decrease in the price level. Therefore, the correct answer is C.

Assume That the Short- Run AS Is Upward Sloping