Suppose the economy is at a short-run equilibrium with real GDP greater than potential GDP. Which of the following fiscal policies would decrease real GDP and the price level?
A) an increase in government expenditure
B) a decrease in taxes
C) an increase in taxes
D) None of the above answers is correct.

Question

Quizplus · Accepted Answer

An increase in taxes would decrease disposable income, leading to a decrease in consumption. This would reduce aggregate demand, which in turn would decrease both the real GDP and the price level, moving the economy towards its potential GDP.

Suppose the Economy Is at a Short-Run Equilibrium with Real