Refer to the information provided in Table 24.6 below to answer the question(s) that follow.
Table 24.6
All Figures in Billions of Dollars
-Refer to Table 24.6. If taxes are reduced from $100 billion to $50 billion and government spending is reduced from $200 billion to $150 billion, the new equilibrium level of income

Question

Refer to the information provided in Table 24.6 below to answer the question(s) that follow.
Table 24.6
All Figures in Billions of Dollars 
-Refer to Table 24.6. If taxes are reduced from $100 billion to $50 billion and government spending is reduced from $200 billion to $150 billion, the new equilibrium level of income

Quizplus · Accepted Answer

Using the Keynesian Cross model, we can calculate the equilibrium level of income using the formula: Y = (1/MPC) x (Autonomous spending). In this case, the initial autonomous spending is $300 billion (government spending of $200 billion plus investment spending of $100 billion). The initial MPC is 0.75 (given in the table as the marginal propensity to consume). 
With taxes reduced to $50 billion, the injection of autonomous spending is $150 billion (the $50 billion tax cut plus the original $100 billion investment spending). With government spending reduced to $150 billion, the total autonomous spending is now $250 billion. 
Using the formula, we can calculate the new equilibrium level of income: Y = (1/0.75) x $250 billion = $333.33 billion or $3,350 billion (in billions of dollars). Therefore, the correct answer is B.

Refer to the Information Provided in Table 24