Assume equilibrium at full employment for an economy characterized by the simple Keynesian model. If the government raises taxes to eliminate a budget deficit,then
A)the rate of unemployment will increase.
B)the level of aggregate output will increase.
C)the price level will increase.
D)the rate of interest will fall.

Question

Quizplus · Accepted Answer

When the government raises taxes to eliminate a budget deficit, it decreases disposable income in the economy. This, in turn, decreases consumption and investment expenditures, lowering aggregate demand. As a result, firms need to produce less, and some workers will lose their jobs, causing the rate of unemployment to increase.

Assume Equilibrium at Full Employment for an Economy Characterized by the Simple