In November, 2012, U.S. lawmakers were faced with a "fiscal cliff:" if they did not agree on how to reduce the federal deficit, automatic tax increases and drastic cuts in government spending would take effect. What would happen if the fiscal cliff occurred?
A) The aggregate demand curve shifts leftward, the price level falls and real GDP decreases.
B) The aggregate demand curve shifts rightward, the price level rises and real GDP increases.
C) The short run aggregate supply curve shift leftward, the price level rises and real GDP decreases.
D) The short run aggregate supply curve shifts rightward, the price level falls and real GDP increases.

Question

Quizplus · Accepted Answer

The fiscal cliff involved automatic tax increases and spending cuts, which would reduce the government's budget deficit but also likely decrease consumer spending and investment. This reduction in spending would lead to a leftward shift in the aggregate demand curve, causing the price level to fall and real GDP to decrease.