In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset an expansionary gap resulting from a $1 billion increase in autonomous consumption, transfers 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 an expansionary gap of $1 billion, autonomous expenditures must decrease by $1 billion. An mpc of 0.75 means that households will reduce autonomous spending by only 75 percent of any decrease in transfers, so the decrease in transfers that is needed is $1 billion/ 0.75 = $1.33 billion.

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