In the traditional Keynesian model, if the government increases spending, then
A)consumption will increase, and so real Gross Domestic Product (GDP)will increase by more than the increase in government spending.
B)consumption will decrease, and so real Gross Domestic Product (GDP)will increase by less than the increase in government spending.
C)consumption will remain the same, and so real Gross Domestic Product (GDP)will increase by the same amount of the increase in government spending.
D)consumption will increase or decrease, and so real Gross Domestic Product (GDP)will increase or decrease depending on the change in consumption.

Question

Quizplus · Accepted Answer

In the traditional Keynesian model, an increase in government spending will lead to an increase in aggregate demand, which will lead to an increase in production and consumption. This increase in consumption will further increase aggregate demand, leading to a multiplier effect, resulting in a larger increase in real GDP than the initial increase in government spending. This is known as the Keynesian multiplier effect. Therefore, option A is the correct answer.

In the Traditional Keynesian Model, If the Government Increases Spending