A decrease in government spending will result in a decrease in the price level and a decrease in real GDP in the long run.

Question

Quizplus · Accepted Answer

A decrease in government spending will initially lead to a decrease in aggregate demand, which can lower the price level and real GDP in the short run. However, in the long run, the economy tends to adjust back to its potential output through mechanisms like price and wage adjustments, making the long-term impact on real GDP neutral rather than a sustained decrease. The long-run effects on the price level can vary depending on other factors in the economy.

A Decrease in Government Spending Will Result in a Decrease