Actions of the Government and The Increase in Prices

Actions of the Government and The Increase in Prices -...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Actions of the Government and The Increase in Prices The United States economy is currently producing at a level of full employment in long-run equilibrium. The government then decides to increase taxes and to reduce government spending in an effort to balance the budget. The results of the actions taken by the government is the decrease of real GDP. When taxes are increased that the amount of disposable income that is available to consumers is lowered. This lowered level of disposable income leads to a decrease in consumption spending as well as a decrease in savings. This decrease in consumer and government spending causes the total spending to decrease by a multiplied amount, As a result of the decrease in total spending the aggregate demand decreases and the aggregate demand curve shifts to the left. This decrease in consumer and government spending also causes businesses to have a surplus of inventories. At this point the output is greater than spending and as a result prices begin to fall. Because of the surplus of goods and falling prices consumption becomes more desirable to consumers and the level of consumer spending rises. The fall in prices causes business to become less profitable and producers decrease the level of production. This results in the
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 10/06/2010 for the course MKT MKT501 taught by Professor Lin during the Spring '10 term at University of Management and Technology.

Page1 / 3

Actions of the Government and The Increase in Prices -...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online