In the Keynesian Model,an Increase in Government Purchases Affects Output

question 39

Multiple Choice

In the Keynesian model,an increase in government purchases affects output by

• A)increasing labor supply, because workers feel effectively poorer.
• B)increasing saving to pay for future taxes, lowering the real interest rate and shifting the IS curve to the left.
• C)increasing the real interest rate due to crowding out, reducing aggregate demand.
• D)increasing aggregate demand as national saving declines.

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Definitions:

MM Theory

Modigliani-Miller Theorem; a financial theory stating that the market value of a company is independent of its capital structure and dividend policy under certain conditions.

MM Model

The Modigliani-Miller theorem, proposing that in an ideal market, the value of a firm is unaffected by its capital structure.

Financial Leverage

The degree to which a company uses fixed-income securities such as debt and preferred equity in its capital structure.

Tax-Deductible Interest

Interest on loans that can be subtracted from one's taxable income, thereby reducing the overall tax liability.