Answer to Question #103310 in Macroeconomics for December

Question

A. An increase in government spending in the Keynesian model leads to...

1. Demand that is greater than supply
2. Demand that is lesser than supply
3. Demand that equals supply
4. Decrease in production

B. In the Keynesian model, suppose a depreciation of the South African rand against the US dollar leads to an increase in exports. What will happen to the aggregate spending curve if imports remain unchanged?

1. It will stay the same
2. It will shift upwards
3. It will shift downwards
4. The slope becomes flatter

Answer 1

A.

Demand that is lesser than supply

Keynesian model refers to a theory which states that the government need to increase demand in order to boost growth in the economy. The model believes the primary driving force in the economy is consumer demand.

In this model, when the government spending increases, with all other factors being constant, the output will increase. Output refers to the quantity of goods and services which are produced in an economy in a particular period of time.  Thus, it will increase production, that is a demand which is lesser than the supply.

B.

3. It will shift downwards

In the Keynesian model, when exports increase and the imports remains unchanged, the domestic expenditure in the economy will decrease. The decrease in the domestic expenditure will then shift the aggregate spending curve downwards.