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Question 20 (5 points) According to Keynes, the policy of incurring budget deficits will cause the...

Question:

Question 20 (5 points) According to Keynes, the policy of incurring budget deficits will cause the equilibrium price level to

Question 20 (5 points) According to Keynes, the policy of incurring budget deficits will cause the equilibrium price level to --------- and equilibrium output to O rise; rise rise; fall O fall; rise O fall; fall remain the same; remain the same

Answers

Keynes believed in the efficacy of fiscal policy to pull the economy out of depression. Incurring budget deficit means Increasing the Government expenditure (G) such that the deficit increases. An increase in G implies a rightward shift of the AD curve to AD' which will increase the aggregate demand at the equilibrium price greater than the supply and hence a situation of excess demand (EE') at the original equilibrium - E'. Excess demand causes an increase in price level which reduces excess demand until Equilibrium is established at E" i.e. higher price P" and higher output level Q" .

Excers demand olan? AD 1: gen Quantity

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