In the short-run Keynesian model, if the mpc equals 0.8, then to increase planned aggregate spending by $20 billion at any output level, government spending must be increased by ________ or net taxes must be decreased by ________.
A)$20 billion; $20 billion
B)more than $20 billion; more than $20 billion
C)less than $20 billion; less than $20 billion
D)$20 billion; more than $20 billion

Question

Quizplus · Accepted Answer

If government spending is increased by $20 billion, planned aggregate spending goes up by $20 billion. Tax cuts increase spending but they also increase savings. In order for households to increase planned spending by $20 billion, they need to receive more than $20 billion in tax cuts.

In the Short-Run Keynesian Model, If the Mpc Equals 0