Suppose the economy's aggregate demand (AD) curve initially intersects the aggregate supply (AS) curve on the latter's Intermediate range. In this case, a contractionary fiscal policy will decrease output but not prices.
A macroeconomic model known as AD-AS, or aggregate demand-aggregate supply, explains price level and production through the interaction between aggregate demand and aggregate supply. The theory put forth by John Maynard Keynes in his book The General Theory of Employment, Interest, and Money serves as the foundation for this statement.
According to Keynes, the equilibrium can only exist when aggregate supply and demand are equal since at that point, there is no propensity for income or output to fluctuate.
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