Question

According to the classical model an increase in government expenditures of 300 dollars will have which...

According to the classical model an increase in government expenditures of 300 dollars will have which of the following effects?
A) drive interest rate up
B) reduce the sum of investment and consumption by 300
C) have no influence on the level of aggregate demand
D) all of the above

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Answer #1

Option D.

  • According to the classical model, when the government spending or expenditure increases, the level of aggregate demand reamins the same as it has no influence on it. This will cause the output and the price level to remain fixed as they depend on the aggregate demand.
  • We know that, increase in the government spending is the sum total of investment and consumption. Therefore when the government expenditure increases, both the consumption and investments in the economy decreases.
  • Increase in government spending raises the interest rates in the economy which discourages the people to consume more.
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