Suppose output exceeds potential output and contractionary fiscal policy is enacted. According to the AS/AD model, in the long run, this fiscal policy will produce:
A)a lower output level and a lower price level than would have occurred if no action were taken.
B)a lower price level than would otherwise have occurred if no action were taken.
C)a lower output level than would otherwise have occurred if no action were taken.
D)neither a lower price level nor a lower output level than would otherwise have occurred if no action were taken.

Question

Quizplus · Accepted Answer

Contractionary fiscal policy reduces aggregate demand, which can lower the price level in the long run without affecting the long-term output level, as the economy returns to its potential output.

Suppose Output Exceeds Potential Output and Contractionary Fiscal Policy Is