In the Keynesian model,an increase in government purchases affects output by
A)increasing labor 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 would increase aggregate demand, as it is a component of GDP, and it would lead to a decline in national saving. This is because the government would either have to borrow to finance the increase in spending, in which case it would draw on private saving, or it could increase the money supply, reducing the demand for money and causing interest rates to fall, leading to higher investment and consumption spending. Therefore, the correct option is D.

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