According to Keynes, the policy of incurring budget surpluses will cause the equilibrium price level to fall.What is the corresponding effect on equilibrium output?
A) It rises.
B) It falls.
C) It remains the same.
D) It first rises, and then falls.

Question

According to Keynes, the policy of incurring budget surpluses will cause the equilibrium price level to fall.What is the corresponding effect on equilibrium output?  
A) It rises. 
B) It falls. 
C) It remains the same. 
D) It first rises, and then falls.

Quizplus · Accepted Answer

According to the Keynesian theory, when the government incurs budget surpluses, it decreases its spending, which decreases the aggregate demand, leading to a fall in the equilibrium price level. This fall in the price level leads to a decrease in the equilibrium output, as the quantity demanded falls due to a decline in real income. Thus, option B is the correct choice.

According to Keynes, the Policy of Incurring Budget Surpluses Will