The impact of government spending in the Keynesian model results in:

Question

a higher level of aggregate spending

an unchanged multiplier

a higher equilibrium level of income, ceteris paribus

all the above statements are correct

Answer 1

The correct answer is:

all the above statements are correct.

In the Keynesian model, an increase in government spending leads to:

1. A higher level of aggregate spending: Government spending is a component of aggregate demand, so when it increases, aggregate spending rises.

2. An unchanged multiplier: The multiplier effect, which measures how much additional economic activity is generated from an initial change in spending (like government spending), is often considered to remain constant in basic Keynesian analysis unless there are changes in economic conditions or consumer behavior.

3. A higher equilibrium level of income, ceteris paribus: With higher aggregate spending, firms increase production and income rises until a new equilibrium is reached.

Thus, all statements are indeed correct in the context of the Keynesian model.