AP Macroeconomics : How to find the effect of deficit spending on aggregate demand

Study concepts, example questions & explanations for AP Macroeconomics

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Example Questions

Example Question #5 : Deficit Spending

If the economy is in severe recession, which of the following fiscal policies would a Keynesian economist most likely recommend?

Possible Answers:

A decrease in government spending in order to offset the decrease in tax revenues that result from an economy in recession.

An increase in personal income taxes in order to help balance the budget.

A decrease in government transfer payments.

An increase in government spending on public infrastructure, even if this spending results in greater budget deficits.

Correct answer:

An increase in government spending on public infrastructure, even if this spending results in greater budget deficits.

Explanation:

The correct answer is that a Keynesian Economist would be most likely to advocate increased spending on public infrastructure if the economy was in recession, even if such an increase results in an increase in budget deficits.

The reason for this is that the Keynesians believe that such an increase in public works spending will lead to an increase in aggregate demand.

 

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