In the Keynesian-cross model, if the MPC equals 0.75, then a $3 billion decrease in taxes increases planned expenditures by _____ and increases the equilibrium level of income by _____.
A)$3 billion; $9 billion
B)$2.25 billion; $6.75 billion
C)$2.25 billion; $2.25 billion
D)$3 billion; $3 billion

Question

Quizplus · Accepted Answer

The initial increase in planned expenditures is the MPC times the change in taxes, which is 0.75 * $3 billion = $2.25 billion. The multiplier effect on equilibrium income is 1/(1-MPC) = 4, so the total increase in income is 4 * $2.25 billion = $9 billion. However, the question asks for the increase in planned expenditures and equilibrium income, which is $2.25 billion and $6.75 billion respectively, considering the initial change.

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