According to the traditional Keynesian approach, if the government increases spending by $10 million and raises current taxes by $10 million at the same time, then
A) real GDP will increase by $10 million.
B) real GDP will decrease by $10 million.
C) real GDP will decrease by more than $10 million.
D) real GDP will remain the same.

Question

Quizplus · Accepted Answer

According to the traditional Keynesian approach, an increase in government spending directly increases aggregate demand, leading to an increase in real GDP. Even though taxes are increased by the same amount, the immediate impact of government spending is typically more direct and potent due to the spending multiplier effect. The tax increase might reduce consumption by less than the increase in government spending due to the marginal propensity to consume being less than one, thus real GDP is expected to increase.

According to the Traditional Keynesian Approach, If the Government Increases