Suppose the economy is at a short run equilibrium and is beyond the economy's long run potential level of real GDP.Which of the following fiscal policies would reduce output and prices in the short run?

Question

Quizplus · Accepted Answer

An increase in taxes would reduce disposable income and aggregate demand, leading to a decrease in output and prices in the short run. Choices A and B, an increase in government spending and a reduction in taxes, would both increase aggregate demand and worsen the inflationary gap. Choice D, an increase in interest rates, would affect the economy through monetary policy rather than fiscal policy, and would not necessarily reduce output and prices in the short run.

Suppose the Economy Is at a Short Run Equilibrium and Is