Based on the figure below. 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

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.

Based on the Figure Below