Suppose the government increases government spending. Which of the following will tend to occur as a result of this policy in a Keynesian model?
A) an inflationary gap
B) demand-pull inflation
C) a movement along the short-run aggregate supply curve
D) all of the above

Question

Quizplus · Accepted Answer

In a Keynesian model, an increase in government spending would shift the aggregate demand curve to the right, causing an increase in output and employment in the short run. This increase in demand may result in an inflationary gap (when output exceeds potential output) and cause demand-pull inflation. The increase in demand would also cause a movement along the short-run aggregate supply curve, as firms increase output and prices in response to the higher demand. Therefore, all of the above options are correct.

Suppose the Government Increases Government Spending