In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, taxes must be:
A)increased by $1 billion.
B)decreased by $1 billion.
C)increased by $1.33 billion.
D)decreased by $1.33 billion.

Question

Quizplus · Accepted Answer

To offset a recessionary gap of $1 billion, autonomous expenditures must increase by $1 billion. An mpc of 0.75 means that households will spend only 75 percent of any reduction in taxes, so the reduction in taxes that is needed is $1 billion/ 0.75 = $1.33 billion.

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