Using the Keynesian cross, if autonomous consumption is $200 and investment is $400, and the marginal propensity to consume is 0.75, while government spending, net exports and taxes are zero, then equilibrium output is
A) $450.
B) $600.
C) $1,050.
D) none of the above.

Question

Quizplus · Accepted Answer

The equilibrium output in a Keynesian cross model is determined by the formula Y = 1/(1 - MPC) * (Autonomous Spending), where MPC is the marginal propensity to consume and Autonomous Spending includes autonomous consumption, investment, and in some cases, government spending and net exports. Here, Autonomous Spending = $200 (autonomous consumption) + $400 (investment) = $600. With an MPC of 0.75, the multiplier is 1/(1 - 0.75) = 4. Thus, the equilibrium output is 4 * $600 = $2400, which is not listed among the options provided.

Using the Keynesian Cross, If Autonomous Consumption Is $200 and Investment