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Suppose that real GDP has been above potential GDP for some period of time. The government is considering a reduction in spending, and the Federal Reserve is trying to determine what is likely to happen to inflation. Trace out two possible scenarios that could occur as a result of decreased government spending. Be sure to comment on the long-run inflation level in each case.
Flexible Budget
A budget that adjusts or flexes with changes in volume or activity levels, allowing for a more accurate comparison of actual to budgeted performance.
Servicing Materials
Materials and supplies used in the maintenance and repair of machinery or equipment during the production process or in providing services.
Flexible Budget
A budget designed to adapt to variations in activity or volume levels.
Total Fixed Cost
The sum of all costs that remain constant regardless of the level of production or sales activity within a certain period.
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