Let’s solve this step-by-step to determine the most appropriate reason for supporting government spending increases over tax cuts in the Keynesian model.

Solution By Steps

Step 1: Understand the Keynesian Model

The Keynesian model suggests that aggregate demand (AD) is the primary driver of economic output and growth in the short run. AD consists of consumption ©, investment (I), government spending (G), and net exports (NX).

Step 2: Compare the Impact of Government Spending and Tax Cuts on AD

Both government spending increases and tax cuts can increase AD, but they work through different channels:

Government spending directly increases AD by increasing G.

Tax cuts indirectly increase AD by increasing disposable income, which can lead to higher consumption ©.

Step 3: Analyze the Multiplier Effect

The multiplier effect refers to the multiple rounds of spending generated by an initial injection of spending into the economy.

The government-spending multiplier is typically larger than the tax multiplier because the entire amount of government spending directly contributes to AD, while only a portion of tax cuts may be spent (with the rest being saved).

Step 4: Evaluate the Impact on Planned and Unplanned Inventory Changes

Keynesian theory does not emphasize the role of unplanned inventory changes in the context of government spending increases or tax cuts. Both policies aim to stimulate planned spending.

Final Answer

The government-spending multiplier is larger than the tax multiplier.

Key Concept

Multiplier Effect

Key Concept Explanation

The multiplier effect refers to the multiple rounds of spending generated by an initial injection of spending into the economy. In the Keynesian model, the government-spending multiplier is typically larger than the tax multiplier because the entire amount of government spending directly contributes to aggregate demand, while only a portion of tax cuts may be spent (with the rest being saved).