Suppose the Government Reduces Its Budget Deficit at the Same

Multiple Choice

Suppose the government reduces its budget deficit at the same time that energy prices rise sharply.Which of the following is most likely to happen?

A) The price level will rise,since higher energy prices increase the cost of production.
B) Real GDP will fall since both events will tend to cause an economic contraction.
C) The price level will fall because the aggregate demand curve has shifted leftward.
D) Real GDP will rise as less government spending leads to more opportunities for the private sector.
E) Both the price level and real GDP will fall.