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Macroeconomics

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Keynesian Spending Multiplier

MACRO-DOILYG

If the marginal propensity to consume is .9 (or 9/10), under which circumstance could a \$15 increase in government spending lead to a \$150 increase in real GDP? Assume a closed economy with no taxes.

A

An upward sloping aggregate supply curve with a constant nominal wage.

B

An increase in the rate of interest that crowds out some private investment.

C

A horizontal aggregate supply curve (fixed price case) with no change in the rate of interest.

D

An economy which has no cyclical unemployment, only frictional unemployment.