In the Keynesian model, the government can respond to a recessionary or inflationary gap by:
A. changing the quantity of money.
B. relying on the spending multiplier to generate a change in real GDP that is a multiple of the change in autonomous spending.
C. changing autonomous spending
Ans: B. relying on the spending multiplier to generate a change in real GDP that is a multiple of the change in autonomous spending.
Explanation:
In the Keynesian model, a recessionary gap can be closed by expansionary policy, and an inflationary gap can be closed by contractionary policy.
The Keynesian model recommends only fiscal policy.
Any change in autonomous spending will not be enough. The change has to be calculated as per the existing spending multiplier in the economy.
The required change can be accomplished by a small alteration in the autonomous spending, which gets multiplied due to the multiplier. Hence, the Keynesian model depends on the size of the multiplier.
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