In the New Keynesian model, an increase in current government spending shifts
A)the output supply curve to the right.
B)the production function up.
C)the output demand curve to the left.
D)the output supply curve to the left.
E)the output demand curve to the right.

Question

Quizplus · Accepted Answer

In the New Keynesian model, an increase in government spending leads to an increase in aggregate demand, which shifts the output demand curve to the right. This increase in aggregate demand, in turn, stimulates output and employment in the short run, leading to a movement along the output supply curve. Therefore, the correct answer is E, as an increase in government spending shifts the output demand curve to the right.

In the New Keynesian Model, an Increase in Current Government