According to the traditional Keynesian approach, if the government cuts taxes, then
A) real Gross Domestic Product (GDP) will rise and the price level will remain constant.
B) real Gross Domestic Product (GDP) will fall but the price level will rise.
C) both real Gross Domestic Product (GDP) and the price level will rise.
D) real Gross Domestic Product (GDP) will remain constant but the price level will rise.

Question

Quizplus · Accepted Answer

According to Keynesian economics, cutting taxes will increase disposable income, leading to an increase in consumer spending and ultimately an increase in real GDP. The increase in aggregate demand will cause prices to rise, but this will be offset by the increase in supply as firms produce more to meet the increased demand. Therefore, real GDP will rise while the price level remains constant.

According to the Traditional Keynesian Approach, If the Government Cuts