Starting from long-run equilibrium, a large decrease in government purchases will result in a(n) ______gap in the short run and ____inflation and ____output in the long run.
A)expansionary; higher; potential
B)recessionary; lower; potential
C)expansionary; higher; higher
D)recessionary; higher; potential

Question

Quizplus · Accepted Answer

A large decrease in government purchases will reduce aggregate demand, leading to a recessionary gap in the short run. In the long run, the economy will adjust to the lower level of government spending, resulting in lower inflation and output.

Starting from Long-Run Equilibrium, a Large Decrease in Government Purchases