In the Keynesian model, a decrease in real autonomous spending results in a more than proportional decrease in real Gross Domestic Product (GDP) because
A) consumption decreases as a result of lower real disposable income.
B) consumption increases while real disposable income decreases.
C) real autonomous spending decreases further as real disposable income decreases.
D) government spending also decreases.

Question

Quizplus · Accepted Answer

In the Keynesian model, a decrease in real autonomous spending means a decrease in aggregate demand. As a result, output and employment levels fall. This leads to a decrease in real disposable income and, consequently, a decrease in consumption spending. Since consumption is a significant component of aggregate demand, the decrease in consumption further reduces aggregate demand and results in a more than proportional decrease in real GDP. Hence, the best choice is A.

In the Keynesian Model, a Decrease in Real Autonomous Spending