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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