In the Keynesian model, an increase in government purchases affects output by
A) increasing labor supply, because workers feel effectively poorer.
B) increasing saving to pay for future taxes, lowering the real interest rate and shifting the IS curve to the left.
C) increasing the real interest rate due to crowding out, reducing aggregate demand.
D) increasing aggregate demand as national saving declines.
D
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The marginal product of labor (measured in units of output) of a firm is given by MPN = A(2000 - N)
where A measures productivity and N is the number of labor hours used in production. Suppose the price of output is $6 per unit and A = 0.002. (a) What will be the demand for labor if the nominal wage is $18? (b) What will be the demand for labor if the nominal wage rises to $21?
What method of financing government spending leads to the least crowding-out?
A) Money creation B) Taxation C) Selling bonds to the public D) Selling government assets, like national parks