In the simple Keynesian model with no government or foreign sectors, assume that full employment occurs at an output level of $10,000. With a marginal propensity to consume of 0.5 and equilibrium output at $9,600, by how much will investment spending have to increase to move the economy to full employment?
A) $50
B) $100
C) $200
D) $400

Question

Quizplus · Accepted Answer

The Keynesian multiplier is 1/(1-MPC) = 1/(1-0.5) = 2. The output gap is $10,000 - $9,600 = $400. To close this gap, investment must increase by $400/2 = $200.

In the Simple Keynesian Model with No Government or Foreign