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Macroeconomics

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Limit to Keynesian Deficit Spending

MACRO-DKGVJO

Which of the following is a limitation to Keynesian deficit spending to reduce unemployment in the United States?

A

Deficit spending will increase the rate of interest, appreciate the currency (the dollar), and reduce exports. The reduction in exports reduced output and employment, increasing unemployment, offsetting the gain in employment from the deficit spending.

B

Deficit spending will lower the rate interest, increase investment, and be inflationary.

C

Deficit spending will lower the price level and increase the real wage. The increase in the real wage will reduce employment.

D

Deficit spending will depreciate the currency, increase the trade deficit, and lead to an outflow of investment funds (deficit in the financial account).