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) expansionary;lower;potential
C) expansionary;higher;higher
D) recessionary;higher;potential
E) recessionary;lower;potential

Question

Quizplus · Accepted Answer

A large decrease in government purchases will lead to a recessionary gap in the short run as aggregate demand decreases. In the long run, inflation will be lower due to decreased demand, and output will return to its potential level as prices and wages adjust.

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