A fiscal policy that reduces taxes or increases government spending will cause a(n)
A)increase in real GDP and a decrease in the price level.
B)increase in real GDP and an increase in the price level.
C)decrease in real GDP and a decrease in the price level.
D)decrease in real GDP and an increase in the price level.

Question

Quizplus · Accepted Answer

Based on the Keynesian model of macroeconomics, a fiscal policy that reduces taxes or increases government spending will increase aggregate demand, leading to an increase in real GDP. However, due to the increased demand for goods and services, prices may also increase, causing an increase in the price level. Therefore, an increase in real GDP and an increase in the price level is the best choice.

A Fiscal Policy That Reduces Taxes or Increases Government Spending