Which of the following statements is true of government spending?
A) An increase in government spending raises the equilibrium level of income by a multiple of the original spending increase.
B) Government spending is a part of monetary policy, not fiscal policy.
C) A decline in government spending brings about an expansion in the economy.
D) An increase in government spending increases the recessionary gap in the economy.
E) An increase in government spending shifts the aggregate demand curve downward by a fraction of the rise in government spending.

Question

Quizplus · Accepted Answer

An increase in government spending raises the equilibrium level of income by a multiple of the original spending increase, known as the spending multiplier effect. This is a key aspect of fiscal policy, which involves government spending and taxation to influence the economy. Option B is incorrect because government spending is a part of fiscal policy, not monetary policy. Option C is incorrect because a decline in government spending usually leads to a contraction in the economy. Option D is incorrect because an increase in government spending can help close a recessionary gap by boosting aggregate demand. Option E is also incorrect because an increase in government spending shifts the aggregate demand curve upward, not downward.

Which of the Following Statements Is True of Government Spending