If government spending rises less than expected, then the equilibrium price level rises under the
A) new classical model.
B) new Keynesian model.
C) both of the above.
D) none of the above.

Question

Quizplus · Accepted Answer

If government spending rises less than expected, then the aggregate demand curve will shift to the left. In the new classical model, this will lead to a decrease in the equilibrium price level. In the new Keynesian model, this will lead to a decrease in the equilibrium output level and a decrease in the equilibrium price level. Therefore, the correct answer is C.

If Government Spending Rises Less Than Expected, Then the Equilibrium