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Macroeconomics

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Fiscal Policy from the Keynesian Perspective

MACRO-UDJPNN

Assume an economy is operating below full employment. Following an increase in government spending, which of the following is most likely according to a Keynesian?

A

Nominal wages will be falling and the unemployment will disappear.

B

Real GDP will increase, the price level will increase, and unemployment will fall.

C

As aggregate demand increases, workers will immediately know that their real wage has fallen and will demand a higher wage, shifting in the aggregate supply curve. There will be no decrease in unemployment.

D

With no cyclical unemployment present, this increase in aggregate demand will only increase the price level.