The simple Keynesian model
A)overstated the effect of an increase in government spending by neglecting the necessary increase in the interest rate and consequent decline in investment that accompany an increase in government spending.
B)understated the effect of an increase in government spending by neglecting the necessary increase in the interest rate and consequent decline in investment that accompany an increase in government spending.
C)overstated the effect of an increase in government spending by neglecting the necessary decrease in the interest rate and consequent increase in investment that accompany a decrease in government spending.
D)understated the effect of an increase in government spending by neglecting the necessary decrease in the interest rate and consequent decrease in investment that accompany an increase in government spending.

Question

Quizplus · Accepted Answer

The simple Keynesian model assumes that an increase in government spending will lead to a corresponding increase in aggregate demand and output without considering the fact that this may lead to an increase in interest rates, which can lead to a decrease in investment spending. Therefore, the model overstates the impact of government spending on output.

The Simple Keynesian Model