Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It reduces inflation by shifting the curve left and decreasing unemployment.
B
It increases inflation as the economy overheats due to less government intervention.
C
It can reduce inflation by shifting the curve left, but may increase unemployment in the short run.
D
It has no impact on inflation as it only affects long-term growth.
Understanding the Answer
Let's break down why this is correct
Answer
A decrease in government spending can lead to lower inflation according to the short-run Phillips curve, which shows the relationship between inflation and unemployment. When the government spends less, it means that there is less money in the economy for people to spend. This reduced spending can lead to lower demand for goods and services, which may cause prices to stop rising quickly or even fall. For example, if the government cuts back on building new roads, fewer workers are needed, leading to higher unemployment. As unemployment rises, people have less money to spend, which helps keep inflation in check.
Detailed Explanation
When the government spends less, it can lower inflation. Other options are incorrect because This answer suggests that less spending lowers unemployment, but that's not true; This option thinks less government spending makes the economy too hot, but that's the opposite effect.
Key Concepts
Fiscal Policy
Inflation Control
Short-Run Phillips Curve
Topic
Fiscal Policy and Inflation Control
Difficulty
medium level question
Cognitive Level
understand
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