In the Keynesian-cross model, if the MPC equals 0.75, then a $2 billion increase in government spending increases planned expenditures by _____ and increases the equilibrium level of income by _____.
A)$2 billion; $4 billion
B)$0.75 billion; $1 billion
C)$0.75 billion; $0.75 billion
D)$1 billion; $4 billion

Question

Quizplus · Accepted Answer

The MPC is the marginal propensity to consume, which is the fraction of each additional dollar of income that is spent on consumption. In this case, the MPC is 0.75, which means that for every additional dollar of income, 75 cents is spent on consumption. Therefore, a $2 billion increase in government spending will increase planned expenditures by $2 billion x 0.75 = $1.5 billion. The equilibrium level of income is the level of income at which planned expenditures equal actual expenditures. Therefore, the $1.5 billion increase in planned expenditures will increase the equilibrium level of income by $1.5 billion / 0.75 = $2 billion.

In the Keynesian-Cross Model, If the MPC Equals 0