Assuming a long-run aggregate supply curve, a decrease in government spending results in ________ in output and ________ in price level.
A) no change; an increase
B) no change; a decrease
C) a decrease; a decrease
D) an increase; no change

Question

Quizplus · Accepted Answer

In the context of a long-run aggregate supply curve, a decrease in government spending would lead to a decrease in aggregate demand. This would not affect the output in the long run (as the economy adjusts back to its natural level of output), but it would lead to a decrease in the price level as the aggregate demand curve shifts to the left.

Assuming a Long-Run Aggregate Supply Curve, a Decrease in Government