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Chapter 19: Problem 3

John Maynard Keynes proposed that the multiplier effect can correct an economic depression. Based on this theory, an increase in equilibrium output would be created by an initial a. increase in investment. b. increase in government spending. c. decrease in government spending. d. both (a) and (b). e. both (a) and (c).

Short Answer

Expert verified
Based on the Keynesian multiplier effect, both an increase in investment and an increase in government spending would lead to an increase in equilibrium output. Therefore, the correct answer is \(d. \text{both (a) and (b)}\).

Step by step solution

01

The Keynesian multiplier effect is the idea that an initial change in spending (either investment or government spending) can lead to a larger shift in equilibrium output, income, and employment. According to John Maynard Keynes, this multiplier effect can help to restore economic equilibrium and correct an economic depression. #Step 2: Analyze the given options#

In this exercise, we are given 5 options about which action would lead to an increase in equilibrium output based on the Keynesian theory: a. increase in investment b. increase in government spending c. decrease in government spending d. both (a) and (b) e. both (a) and (c) #Step 3: Evaluate the options#
02

We can now evaluate each option in light of Keynesian theory. a. Increase in investment - According to Keynes' multiplier effect, an initial increase in investment would lead to a larger shift in equilibrium output. b. Increase in government spending - Similarly, an increase in government spending would also cause a shift in equilibrium output due to the multiplier effect. c. Decrease in government spending - The decrease in government spending would not cause an increase in equilibrium output as it contracts the total expenditure in the economy. d. Both (a) and (b) - This option correctly states that both an increase in investment and an increase in government spending would lead to an increase in equilibrium output. e. Both (a) and (c) - This option is incorrect as it includes the decrease in government spending, which would not lead to an increase in equilibrium output. #Step 4: Choose the correct answer#

Based on our evaluation of the options, we can now conclude that the correct answer is: d. both (a) and (b), as both an increase in investment and an increase in government spending would lead to an increase in equilibrium output according to Keynes' multiplier effect.

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Most popular questions from this chapter

The net exports line can be a. positive. b. negative. c. zero. d. any of the above.

If the marginal propensity to consume (MPC) is \(0.90,\) a \(\$ 100\) billion increase in planned investment expenditure, other things being equal, will cause an increase in equilibrium output of a. \(\$ 90\) billion. b. \(\$ 100\) billion. c. \(\$ 900\) billion. d. \(\$ 1,000\) billion.

Using the aggregate expenditure-output model, assume the aggregate expenditures \((A E)\) line is above the 45 -degree line at full-employment GDP. This vertical distance is called a (an) a. inflationary gap. b. recessionary gap. c. negative GDP gap. d. marginal propensity to consume gap.

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There will be unplanned inventory investment accumulation when a. aggregate output (real GDP) equals aggregate expenditures. b. aggregate output (real GDP) exceeds aggregate expenditures. c. aggregate expenditures exceed aggregate output (real GDP). d. firms increase output.
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