A Decrease in Government Spending Reduces Output More in the Keynesian-Cross

question 114

Essay

A decrease in government spending reduces output more in the Keynesian-cross model than in the IS-LM model. Explain why this is true.

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Definitions:

Variable Overhead

Costs that vary with the level of production output, such as raw materials and direct labor.

Contribution Margin

The amount remaining from sales revenue after variable costs have been deducted, indicating how much revenue is contributing to covering fixed costs and generating profit.

Income Statement

A financial statement that reports a company's financial performance over a specific accounting period, detailing revenues and expenses.

Expenses

Outflows or depletions of assets or incurrences of liabilities during a period as a result of delivering or producing goods, rendering services, or carrying out other activities linked to an entity's main operations.