Suppose real GDP exceeds potential real GDP.If the government decreases its expenditures on goods and services,then real GDP ________ and the price level ________.
A) decreases; rises
B) increases; falls
C) decreases; falls
D) increases; rises

Question

Quizplus · Accepted Answer

When real GDP exceeds potential GDP, the economy is in an inflationary gap. Decreasing government expenditures reduces aggregate demand, leading to a decrease in real GDP and a fall in the price level as the economy moves towards equilibrium.

Suppose Real GDP Exceeds Potential Real GDP