In the short run, a fiscal policy action that results in a reduction in the size of the budget deficit will cause
A) an increase in real GDP with stable prices if the economy was below full employment.
B) a reduction in real GDP with falling prices if the economy was below or at full employment.
C) an inflationary gap if the economy was initially operating at full employment.
D) an inflationary gap if the economy was initially operating below full employment.

Question

Quizplus · Accepted Answer

A reduction in the budget deficit would likely mean reduced government spending and/or increased taxes, which would reduce aggregate demand and cause a contraction in the economy. If the economy was already operating below or at full employment, this contraction would cause a reduction in real GDP and falling prices.

In the Short Run, a Fiscal Policy Action That Results