According to the New Classical Theory, a $50 Billion Increase

question 137

Multiple Choice

According to the new classical theory, a $50 billion increase in government expenditures financed by a $50 billion increase in the budget deficit will

• A) cause real output to expand $200 billion if the marginal propensity to consume is three-fourths.
• B) exert little impact on real output because higher real interest rates will crowd out private spending.
• C) stimulate aggregate demand, causing prices to rise (inflation).
• D) be largely offset by a reduction in private spending because individuals will anticipate higher future taxes.

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Definitions:

Capitalize

To record a cost or expense on the balance sheet for the purposes of delaying full recognition of the expense over time through depreciation or amortization.

Expense Account

An account used to track expenditures associated with business operations, often related to employee travel or business activities.

Asset Account

An account recorded on the balance sheet that represents items of value owned by a company, such as cash, inventory, buildings, and equipment.

Straight-line Method

A method of calculating depreciation by uniformly distributing the cost of an asset minus its salvage value over its useful life.