In the simple Keynesian model,if the equilibrium level of income is $300 billion,the MPC is 0.75,and government expenditures increase by 20 billion.What is the new equilibrium level of income?
A)$320 billion
B)$380 billion
C)$220 billion
D)$520 billion

Question

Quizplus · Accepted Answer

In the simple Keynesian model, the multiplier (M) is calculated as 1/(1-MPC). Given an MPC of 0.75, the multiplier is 1/(1-0.75) = 4. An increase in government expenditures of $20 billion, multiplied by the multiplier of 4, results in an increase in the equilibrium level of income by $80 billion ($20 billion * 4). Therefore, the new equilibrium level of income is $300 billion + $80 billion = $380 billion.

In the Simple Keynesian Model,if the Equilibrium Level of Income