- Refer to the above graph. Assume that the economy initially has a price level of P₂ and output level Q₂. The price level is flexible and the government decides to adopt a contractionary fiscal policy. What would most likely be the new equilibrium price level and output?

Question

- Refer to the above graph. Assume that the economy initially has a price level of P<sub>2</sub> and output level Q<sub>2</sub>. The price level is flexible and the government decides to adopt a contractionary fiscal policy. What would most likely be the new equilibrium price level and output? A) P<sub>2</sub> and Q<sub>4</sub> B) P<sub>1</sub> and Q<sub>1</sub> C) P<sub>2</sub> and Q<sub>2</sub> D) P<sub>1</sub> and Q<sub>3</sub>

Quizplus · Accepted Answer

A contractionary fiscal policy would decrease aggregate demand, leading to a lower price level and output, moving the equilibrium to P₁ and Q₁.

- Refer to the Above Graph