In the Keynesian model,an increase in government purchases affects output by
A)increasing labour supply,because workers feel effectively poorer.
B)increasing saving to pay for future taxes,lowering the real interest rate and shifting the IS curve to the left.
C)increasing the real interest rate due to crowding out,reducing aggregate demand.
D)increasing aggregate demand as national saving declines.

Question

Quizplus · Accepted Answer

In the Keynesian model, an increase in government purchases leads to an increase in aggregate demand, which results in an increase in output. This is because government purchases are a component of aggregate demand, and an increase in government purchases will cause a decrease in national saving, both of which can lead to an increase in output. Therefore, answer D, which states that an increase in government purchases affects output by increasing aggregate demand as national saving declines, is the best choice.

In the Keynesian Model,an Increase in Government Purchases Affects Output