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 ____________________

a. increase Real GDP and raise
b. the price level decrease Real GDP and raise
c. the price level increase Real GDP and leave
d. the price level unchanged increase Real GDP and lower the price level

Answer 1

Answer: Option C : Increases Real GDP and leave the price level unchanged.

Explanation:

One of the assumption of the Keynesians and I quote...

"Keynesians believe that prices, and especially wages, respond slowly to changes in supply and demand, resulting in periodic shortages and surpluses, especially of labor."

From the above we can conclude that for an increased in spending leads to Increases Real GDP and leave the price level unchanged.