The figure given below shows the macroeconomic equilibria of a country. Figure 11.1 -Refer to Figure 11.1. A decrease in government spending would be most effective in reducing the price level if the economy were in equilibrium: A) at point A. B) at point B. C) when real GDP equals Y₁. D) when real GDP equals Y₃. E) when real GDP equals Y₂.

Question

Quizplus · Accepted Answer

A decrease in government spending would be most effective in reducing the price level when the economy is at a point where it is producing beyond its potential output, such as when real GDP equals Y₃. At this level, the economy is likely experiencing inflationary pressures, so reducing government spending can help lower the price level.

The Figure Given Below Shows the Macroeconomic Equilibria of a Country