In the traditional Keynesian model, an increase in government spending
A) causes the C + I + G + X line to shift upward by the full amount of the increase in government spending.
B) causes the C + I + G + X line to shift upward by an amount less than the increase in government spending.
C) causes the C + I + G + X line to shift upward by more than the increase in government spending.
D) causes no change in the C + I + G + X line.

Question

Quizplus · Accepted Answer

In the traditional Keynesian model, an increase in government spending causes the C + I + G + X line to shift upward by the full amount of the increase in government spending, since it is assumed that an increase in G (government spending) will lead to an increase in aggregate demand, as households will have more income to spend and firms will have more business opportunities. This assumes an environment where there is no crowding out effect, where the increase in government spending does not lead to a decrease in private spending (C + I) or an increase in interest rates that could negatively affect investment.

In the Traditional Keynesian Model, an Increase in Government Spending