Refer to the accompanying figure. Starting from long-run equilibrium at point C, a decrease in government spending that decreases aggregate demand from AD¹ to AD will lead to a short-run equilibrium at ________ creating ________ gap.
A)D; an expansionary
B)D; a recessionary
C)B; no output
D)B; recessionary

Question

Refer to the accompanying figure.  Starting from long-run equilibrium at point C, a decrease in government spending that decreases aggregate demand from AD¹ to AD will lead to a short-run equilibrium at ________ creating ________ gap.
A)D; an expansionary 
B)D; a recessionary 
C)B; no output 
D)B; recessionary

Quizplus · Accepted Answer

A decrease in government purchases is an example of an exogenous decrease in spending, which shifts aggregate demand left. A new short-run equilibrium will exist at point D, where the economy is experiencing a recessionary gap.

Refer to the Accompanying Figure