Final answer:
A permanent increase in government expenditures typically boosts economic activity, potentially leading to greater employment and incomes, and thereby, more consumption. It often requires higher taxation or borrowing to finance the increased spending, rather than resulting in lower taxes. The correct option is (d) Greater income.
Step-by-step explanation:
According to the model studied, a permanent increase in government expenditures can have various effects on an economy, but the question specifically asks whether such an increase would lead to less wealth, lower taxes, more consumption, or greater income. An increase in government spending typically stimulates economic activity and can potentially lead to higher aggregate demand. This is because government expenditures, a component of GDP, directly increase total spending in the economy.
When the government increases its spending, it may do so by increasing its borrowing, taxing more, or using existing reserves. If the government borrows more, this can lead to higher interest rates unless offset by monetary policy. Higher government spending can boost economic activity and, therefore, increase employment and incomes as businesses respond to increased demand. This tends to increase overall consumption since individuals have more income to spend. However, without corresponding increases in production, this can also lead to inflationary pressures over time.
The notion that increased government expenditures can lead to greater income is consistent with The Keynesian multiplier effect, which suggests that an initial amount of spending can lead to a larger increase in aggregate economic activity. However, whether it results in "less wealth" focuses on the long-term impact of increased government debt and potential crowding-out effects, which could dampen private investment.
It's important to note that greater government spending is not associated with lower taxes; it often requires higher taxes or greater borrowing to finance it. Additionally, assuming a rational behavior, an anticipated increase in future taxes to pay for the government's spending might lead to a decrease in consumption and an increase in savings instead.
In conclusion, based on the effects of a permanent increase in government spending on the factors provided, the most accurate answer would be (d) Greater income, as this is the most direct outcome of increased government-driven demand for goods and services.