Question

Given that the economy is operating in the horizontal section of the aggregate supply curve in the simple Keynesian model, an increase in spending will ____________________ (assuming that the economy remains in the horizontal section of the aggregate supply curve).

Answer 1

Answer:

Given that the economy is operating in the horizontal section of the aggregate supply curve in the simple Keynesian model, an increase in spending will lead to __________no change in price level and an increase in real GDP__________ (assuming that the economy remains in the horizontal section of the aggregate supply curve).

Explanation:

When the aggregate supply curve shifts outward, the economy's output and real GDP increase at a given price in the short-run when aggregate supply is determined by price.  But with the simple Keynesian model, price does not influence supply as there is an equilibrium in the aggregate expenditures and output in the economy.