Current equilibrium output equals $2,500,000 potential output equals $2,600,000 and the marginal propensity to consume equals 0.75. Under these conditions, a Keynesian economist is most likely to recommend.
A) decreasing taxes by $100,000
B) increasing government spending by $33,333
C) increasing government spending by $25,000
D) decreasing taxes by $25,000
E) increased government spending by
$100,000
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What does a decrease in government spending cause?
Decreasing government spending tends to slow economic activity as the government purchases fewer goods and services from the private sector. Increasing tax revenue tends to slow economic activity by decreasing individuals' disposable income, likely causing them to decrease spending on goods and services.
Which of the following will most likely result from a decrease in government spending responses?
The economy experiences increased interest rates due to reduced government spending, eventually causing inflation in the long run.
What happens when the government spends less?
If the government spends less than it collects in revenue, there is a budget surplus. In fiscal year (FY) 2022, the government spent $6.27 trillion, which was more than it collected (revenue), resulting in a deficit. Visit the national deficit explainer to see how the deficit and revenue compare to federal spending.
Which of the following is the effect of an increase in government spending?
According to Keynesian economics, increased government spending raises aggregate demand and increases consumption, which leads to increased production and faster recovery from recessions.