Suppose the economy is at an equilibrium on the LRAS curve and the government decreases spending.In the short run one would expect

Question

Quizplus · Accepted Answer

Decreasing government spending would cause a decrease in aggregate demand, which would shift the aggregate demand curve leftward. In the short run, this would lead to a decrease in both output and prices, as firms would produce less and charge lower prices due to lower demand. However, in the long run, the economy would adjust back to the LRAS curve, with output returning to potential GDP and prices returning to their original level.

Suppose the Economy Is at an Equilibrium on the LRAS