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 increase output and prices in the short run?

Question

Quizplus · Accepted Answer

A reduction in taxes would lead to an increase in disposable income, which would increase consumption spending and, therefore, aggregate demand. This would lead to an increase in output and prices in the short run. A decrease in government spending would decrease aggregate demand and would likely lead to a decrease in output and prices. An increase in taxes would also decrease disposable income and lead to a decrease in consumption spending and, therefore, aggregate demand. An increase in interest rates would likely decrease investment spending and also decrease aggregate demand, leading to a decrease in output and prices.

Suppose the Economy Is at a Short Run Equilibrium and Is