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

Question

Quizplus · Accepted Answer

A $1 billion increase in autonomous consumption shifts the PAE curve upward. To shift it back down to its original position, government purchases (another type of autonomous expenditures)must be decreased by $1 billion.

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