Which of the following statements is true of government spending?
A)An increase in government spending raises the equilibrium level of income by a multiple of the original spending increase.
B)Government spending is a part of monetary policy, not fiscal policy.
C)A decline in government spending brings about an expansion in the economy.
D)Increase in government spending increases the recessionary gap in the economy.
E)An increase in government spending shifts the aggregate demand curve downward by a fraction of the rise in government spending.

Question

Quizplus · Accepted Answer

An increase in government spending raises the equilibrium level of income by a multiple of the original spending increase. This is because increased government spending leads to an increase in aggregate demand, which leads to an increase in output and income. The size of the multiplier effect depends on various factors such as the marginal propensity to consume, the marginal tax rate, and the extent of leakages in the economy.

Which of the Following Statements Is True of Government Spending