Question

Suppose the U.S. Congress cuts federal government spending in order to balance the Federal budget. Use the AD/ AS model to analyze the likely impact on output and employment.

Short answer

There will be no increase in output and employment.

Step-by-step solution

Given information

Given that the U.S. Congress cuts federal government spending to balance the Federal budget

We have to analyze the likely impact on output and employment by using the AD/ AS model

Explanation

When U.S. Congress increases federal government spending to balance the federal budget means it would be in surplus. Then aggregate demand will rise. It is shown in the diagram, that when government sending increases aggregate demand curve shifts to the right from AD to AD1 and it intersects the aggregate supply curve at E1 rather than the previous point which was E, which indicated that real output and employment in the economy will rise shown by new point OQ1, maybe past degree of result and business was $OQ$lower than$OQ1$( level of output and employment changed). But if the economy reaches the full employment level (E2) then only the price level will increase, there will be no increase in output and employment.

Diagram

The AD/AS model Diagram

Final Answer 

If the economy reaches the full employment level (E2) then only the price level will increase, there will be no increase in output and employment.