If the economy is at an output level above the LRAS curve,which of the following fiscal policies would likely lead to a lower equilibrium level of real GDP in the short run?

Question

Quizplus · Accepted Answer

If the economy is already operating above the long-run aggregate supply (LRAS) curve, it implies that the output level is already beyond the full-employment equilibrium level. To bring the economy back to the full-employment level, contractionary fiscal policies are needed. Reducing government spending and/or increasing taxes will reduce aggregate demand, leading to a decrease in the equilibrium level of real GDP in the short run. Option A, B, and C are expansionary fiscal policies that will further push the economy beyond the LRAS curve, making the situation worse.

If the Economy Is at an Output Level Above the LRAS