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Assume that the output (Y) is at an ideal level. However, the U.S. economy is suffering...

Assume that the output (Y) is at an ideal level. However, the U.S. economy is suffering from a budget deficit. What policy or policies do you propose to reduce the budget deficit without changing the output?

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there would be a mix of contractionary fiscal policy and expansionary monetary policy in order to maintain the equilibrium level of output. Government can increase its taxes or decrease government spending which will reduce its deficit. At the same time it can use monetary expansion to increase the money supply which will restore the lost income due to contractionary fiscal policy. In the end the aggregate demand will shift to the left because of contractionary fiscal policy and simultaneously it will be shifting to the right due to monetary expansion.

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