Suppose the economy is experiencing a contractionary gap and the government decreases spending to close the gap.In the short run one would expect

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Quizplus · Accepted Answer

A contractionary gap means that the economy is producing below its potential and therefore there is a high level of unemployment. By decreasing spending, the government is reducing the demand for goods and services, which will decrease the output, and as a result, lower the price level. Therefore, we would expect both output and the price level to fall in the short run.

Suppose the Economy Is Experiencing a Contractionary Gap and the Government