Actions of The Fed at Full Employment in Long Run Equilibrium

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 …

…demanded and aggregate quantity supplied are equal. This causes the U.S. economy to enter a state of long-run equilibrium at full employment. This new level of equilibrium should be very similar to the original long-run equilibrium. The total real GDP has not been affected. Government spending and consumption have both decreased. Investment spending has risen because of the new lower interest rates. Because of this real GDP is not effected in the long run.