Should autonomous consumption fall by one dollar,the effect of this on equilibrium income can be offset if government expenditure
A)falls by one dollar.
B)rises by one dollar.
C)falls by 1/(1 - C)dollars.
D)rises by 1/(1 - c)dollars.
E)rises by c/(1 - c)dollars.

Question

Quizplus · Accepted Answer

According to the Keynesian model, autonomous consumption is one of the determinants of equilibrium income. If autonomous consumption falls by one dollar, then equilibrium income will also fall by the multiplier amount (1/(1-c)), where c is the marginal propensity to consume. However, if government expenditure rises by one dollar, then the multiplier effect will offset the decrease in autonomous consumption, and the equilibrium income will not change. Therefore, option B is the best choice.

Should Autonomous Consumption Fall by One Dollar,the Effect of This