In a simple Keynesian model,a decrease in government spending
A) shifts the C + I + G line upward.
B) reduces potential GDP below its full-employment level.
C) causes price levels to rapidly increase.
D) means the C + I + G line intersects the 45-degree line at a reduced GDP.
E) affects the composition of GDP but not its value.

Question

Quizplus · Accepted Answer

In a simple Keynesian model, the C + I + G line shows the level of aggregate demand necessary to achieve a certain level of GDP. When government spending decreases, aggregate demand decreases, and the C + I + G line shifts downward. This shift results in a lower level of GDP where the C + I + G line intersects the 45-degree line, indicating that the economy is producing less than its full-employment level. Therefore, the correct answer is D.

In a Simple Keynesian Model,a Decrease in Government Spending