Final answer:
A decrease in government spending would shift the AD curve to the left, leading to a decrease in output and employment.
Step-by-step explanation:
The AD/AS model is used to analyze the impact of Congress cutting federal government spending to balance the Federal budget on output and employment. In this scenario, a decrease in government spending would shift the Aggregate Demand (AD) curve to the left, leading to a decrease in output and employment.
When government spending is reduced, there is a decrease in government expenditures, which in turn leads to a decrease in aggregate demand. This decrease in aggregate demand means that businesses will produce and supply less, resulting in a decrease in output and employment. For example, if the government reduces spending on infrastructure projects, construction companies may lay off workers and reduce output.
In the AD/AS model, a decrease in government spending would cause a leftward shift of the AD curve, resulting in a decrease in equilibrium output and employment. The impact on the price level would depend on other factors affecting the economy, such as the state of inflation.