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Now consider an economy in which the government lowers its spending. In the long run, the...

Now consider an economy in which the government lowers its spending. In the long run, the result would be _____________ in the price level and _____________ in real output.

Group of answer choices

an increase; an increase

a decrease; a decrease

a decrease; no change

no change; a decrease

None of the listed options is correct.

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Answer #1

Correct choice is a decrease; no change

In the short run, this reduction in government spending will decrease aggregate demand and reduce the level of GDP and the price level. In the long run short run aggregate supply curve will shift right, which will increase the GDP and GDP will reach back to its full employment level while price will decline further.

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