Suppose the government permanently reduces spending in an effort to reduce the budget deficit. In the new long-run equilibrium, output will ________ and the price level will ________.
A) decrease; decrease
B) remain unchanged; decrease
C) remain unchanged; increase
D) decrease; remain unchanged
E) increase; decrease

Question

Quizplus · Accepted Answer

In the long run, output remains unchanged at its natural level due to the economy's self-correcting mechanism, but the price level decreases as reduced government spending lowers aggregate demand.

Suppose the Government Permanently Reduces Spending in an Effort to Reduce