According to the Keynesian view, an unanticipated reduction in spending will
A) increase the demand for goods and services.
B) raise business inventories and lead to a decline in output.
C) lead to lower interest rates, which will stimulate aggregate demand and keep the economy at full employment.
D) lead to a lower price level, which will quickly guide the economy to full-employment equilibrium.

Question

Quizplus · Accepted Answer

According to the Keynesian view, a reduction in spending will lead to a decline in output due to excess inventories. This is because businesses will produce less to match the lower demand, leading to a situation where inventory levels rise. As businesses try to clear excess inventories, they will cut back on production, which will reduce output and employment levels. Therefore, the correct answer is B.

According to the Keynesian View, an Unanticipated Reduction in Spending