Question

Consider the following statements regarding how government spending responds to changes in aggregate income, wealth, and interest rates.

A. Government spending responds directly to changes in aggregate income, wealth, and interest rates. Changes in aggregate income, wealth, and interest rates automatically cause government spending to change.

B. Government spending does not respond directly or indirectly to changes in aggregate income, wealth, or interest rates. Changes in aggregate income, wealth, and interest rates do not have any effect on government spending.

C. Government spending responds indirectly to changes in aggregate income, wealth, or interest rates. During a recession, aggregate income and wealth will fall and the government may decide to increase government spending to stimulate output and jobs in the economy.

Which of the statements are true?

Statement C

Statement A

Statement B

Answer 1

Statement C is True which says that Government spending responds indirectly to changes in aggregate income, wealth, or interest rates. During a recession, aggregate income and wealth will fall and the government may decide to increase government spending to stimulate output and jobs in the economy

Renowned economist John Maynard Keynes, stated this philosphy. His point was that govenment plays an important role when economy is in recession or depression like situation. Government should increase spending to have pickup in the economic activity in case of depression.

According to Keynesian Economics, they should decrease taxes. A decrease in taxes gives people more money to spend and thus shifts the demand curve right. However if, the government is increasing taxes in order to then spend that money on domestic projects, this will actually increase the GDP by more than simply cutting taxes. But the bottom line remains that the govenmnent should indirectly come in picture whenever aggregate income, wealth, or interest rates changes.