Keynesian economics predicts that if government policy makers deem current equilibrium real Gross Domestic Product (GDP) to be "too low," then an appropriate policy action would be to
A) do nothing, because the economy is self-adjusting.
B) raise government spending, thereby increasing aggregate demand and pushing up real Gross Domestic Product (GDP) with little or no inflationary consequences.
C) increase taxes, thereby causing aggregate demand to increase and inducing a rise in real Gross Domestic Product (GDP) with little or no inflationary consequences.
D) reduce the money stock, thereby causing aggregate demand to decrease and inducing a rise in fall in the price level that generates an increase in total planned expenditures.

Question

Quizplus · Accepted Answer

Keynesian economics highlights that when equilibrium real GDP is too low, government should intervene by increasing its own spending to stimulate aggregate demand as it leads to a multiplier effect on employment and output without significantly affect inflation. Choice A is incorrect because the Keynesian model does not assume an automatic adjustment pathway for the economy. Choice C is erroneous as it would reduce disposable income, causing a fall in demand, not increase it. Option D is also inapt as it proposes to decrease aggregate demand, which would cause a contraction of the economy, not expansion, contradicting the initial premise.

Keynesian Economics Predicts That If Government Policy Makers Deem Current