Draw the graph · Macro · Aggregate demand and aggregate supply
Government spending is cut
Drag a curve sideways, or use its arrows. A curve you do not move is a curve you are saying stays put. Make each shift clear enough that a reader could see it.
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Aggregate demand shifts left. Short-run aggregate supply stays put. Long-run aggregate supply stays put.
Government purchases are a component of aggregate demand. When they fall, total spending on the economy's output falls at every price level, so AD shifts left. The supply side is unchanged. Output falls below potential.
The price level falls and real GDP falls, opening a recessionary gap.
Common mistake. A frequent slip is to shift SRAS right, reasoning that lower debt is good for the economy. Whatever the long-run merits, the immediate effect of less spending is a fall in demand.
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Lesson: Fiscal Policy Basics