A decrease in government spending will decrease the equilibrium price level and decrease aggregate output, ceteris paribus.

Question

Quizplus · Accepted Answer

When government spending decreases, it reduces the overall demand in the economy, causing a leftward shift in the aggregate demand curve. This leads to a decrease in the equilibrium price level and a decrease in aggregate output, as firms produce less in response to the lower demand.

A Decrease in Government Spending Will Decrease the Equilibrium Price