Question $2$

$1$ pts

In $2012-13,$ the Republican Congress and Democratic President Obama were unable to come to an agreement on a budget for the next year. This was called "going over the fiscal cliff" and triggered "sequestration" $-$ a vefy tight budget neither party favored. Government spending was reduced by $$500$ billion. What did monetarist economists predict this would do to the US economy?

Send the economy back into recession $-$ lower GDP$,$ lower inflation

It depends on what the Federal Reserve does in response. If they offset the decrease in $AD,$ there might be no change at all.

Send the economy into stagflation $-$ lower GDP and higher inflation

Lower spending will lower budget deficits, which will encourage private sector investment and long run economic growth

While this will lower inflation, it is not expected to have any impact on real GDP because the AS curve is vertical in the long run.