Suppose the economy is producing below the natural rate of output and the government is suffering from large budget deficits.To deal with the deficit problem,suppose the government takes a policy action to reduce the size of the deficits.This policy action will cause ________ in the unemployment rate in the short run and ________ in the aggregate price level in the short run,everything else held constant.
A)an increase; an increase
B)a decrease; a decrease
C)a decrease; an increase
D)an increase; a decrease

Question

Quizplus · Accepted Answer

Reducing budget deficits typically involves decreasing government spending or increasing taxes, both of which can reduce aggregate demand. This reduction in demand can lead to higher unemployment and lower price levels in the short run.

Suppose the Economy Is Producing Below the Natural Rate of Output