Suppose the economy is initially operating at full employment. A reduction in the size of the budget deficit will cause which of the following in the long run?
A) a recessionary gap
B) a reduction in real GDP
C) an inflationary gap
D) none of the above

Question

Quizplus · Accepted Answer

If the economy is initially operating at full employment, reducing the budget deficit is unlikely to cause a recessionary gap or a reduction in real GDP in the long run. It may prevent an inflationary gap from forming, but this is not a guaranteed outcome. Therefore, the best choice is D - none of the above.

Suppose the Economy Is Initially Operating at Full Employment