Question

With keeping tax rate (T) constant if government purchases (G) increase, then arrange the following statements considering the effect on total income and output: (A) Rise in Plan Aggregate expenditure.
(B) Government runs a deficit when G exceeds T.
(C) Equilibrium income level increased.
(D) Aggregate demand schedule shifts upward.

• A. (B), (A), (D), (C)
• B. (A), (C), (B), (D)
• C. (A), (B), (D), (C)
• D. (C), (B), (D), (A)

Hint:

In Keynesian economics: Increase in G → higher planned expenditure → AD shifts upward → higher income/output.

Answer 1

The Correct Option is A

Step 1: Analyze the impact of increased government spending.
- A rise in government spending (G) with constant taxes (T) can lead to a government deficit if G>T.
- Increased government spending elevates planned aggregate expenditure.
- This action causes an upward shift in the aggregate demand (AD) curve.
- The ultimate result is a new equilibrium with higher output and income.
Step 2: Order the causal sequence.
1. (B) Government incurs a deficit if expenditure surpasses tax revenue.
2. (A) Planned aggregate expenditure increases.
3. (D) The aggregate demand curve shifts upwards.
4. (C) Equilibrium income rises.
Final Answer: \[\boxed{(B), (A), (D), (C)}\]