Exhibit 20A-2 Macro AD/AS Models

-In Panel (b)of Exhibit 20A-2,the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂.If the federal government or Fed decides to intervene,it would most likely:
A) decrease taxes.
B) increase the money supply.
C) increase the level of government spending for goods and services.
D) decrease the level of government spending for goods and services.

Question

Exhibit 20A-2 Macro AD/AS Models
 
-In Panel (b)of Exhibit 20A-2,the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂.If the federal government or Fed decides to intervene,it would most likely:
A) decrease taxes. 
B) increase the money supply. 
C) increase the level of government spending for goods and services. 
D) decrease the level of government spending for goods and services.

Quizplus · Accepted Answer

To reduce inflationary pressure and bring the economy back to long-run equilibrium, the government or Fed would likely decrease government spending, which would reduce aggregate demand and help lower the price level.