In a short-run Keynesian model where the marginal propensity to consume is 0.5, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, government purchases must be:
A)increased by $1 billion.
B)decreased by $1 billion.
C)increased by $0.5 billion.
D)increased by $2 billion.

Question

Quizplus · Accepted Answer

A $1 billion decrease in autonomous consumption shifts the PAE line downward. To shift it back to its original position, government purchases (another type of autonomous expenditures)must be increased by $1 billion.

In a Short-Run Keynesian Model Where the Marginal Propensity to Consume