Question

1.Use the Keynesian cross to examine the effect of:

A. An increase in government purchases.
B. An increase in taxes.
C. An equal increase in government purchases and taxes�

Answer 1

[AI-generated answer — Bot GPT 3.5]

A. An increase in government purchases:

When government purchases increase, this will shift the aggregate expenditure line upward, increasing the equilibrium level of real GDP. As a result, there will be an increase in both real GDP and the level of aggregate consumption and investment.

B. An increase in taxes:
An increase in taxes will decrease disposable income, which will shift the aggregate expenditure line downward. This will lead to a decrease in the equilibrium level of real GDP and a decrease in aggregate consumption and investment.

C. An equal increase in government purchases and taxes:
If both government purchases and taxes increase by the same amount, the effects will partially offset each other. The increase in government purchases will lead to an increase in the equilibrium level of real GDP and aggregate consumption and investment, while the increase in taxes will lead to a decrease in the equilibrium level of real GDP and aggregate consumption and investment. The overall effect will depend on the magnitude of the changes and the relative multiplier effects of government spending and taxes.