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      Question

      Government increases spending on infrastructure and

      public sector employment. How does this affect GDP and inflation in the short run according to Keynesian theory?
      A GDP falls, inflation falls Correct Answer Incorrect Answer
      B GDP rises, inflation falls Correct Answer Incorrect Answer
      C GDP rises, inflation may rise Correct Answer Incorrect Answer
      D GDP stable, inflation stable Correct Answer Incorrect Answer
      E GDP falls, inflation rises Correct Answer Incorrect Answer

      Solution

      Demand-side stimulus increases GDP and potentially causes demand-pull inflation.

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