Ignoring any supply-side effects,if government expenditure on goods and services decreases by $10 billion and taxes decrease by $10 billion,then real GDP ________ and the price level ________.

Question

Quizplus · Accepted Answer

If government expenditure on goods and services decreases by $10 billion, it means that there will be $10 billion less spending in the economy. This will lead to a decrease in aggregate demand and a shift to the left in the AD curve. If taxes decrease by $10 billion, it will put more money in the hands of consumers and firms, but this increase in disposable income will not be enough to offset the decrease in spending due to the cut in government expenditure. Therefore, aggregate demand will decrease and shift to the left.

As a result, real GDP will decrease because there will be less demand for goods and services. The price level will also decrease because of the decrease in aggregate demand, leading to less pressure on prices.

Ignoring Any Supply-Side Effects,if Government Expenditure on Goods and Services