In the Keynesian AE model,if the autonomous components of consumption,investment,government spending,and net export spending initially total $200 billion,and the MPS is 0.2,by how much will equilibrium output change if governments increase their spending by $5 billion?
A)by $1 billion
B)by $5 billion
C)by $10 billion
D)by $25 billion

Question

Quizplus · Accepted Answer

The spending multiplier in the Keynesian model is calculated as 1/MPS. With an MPS of 0.2, the multiplier is 1/0.2 = 5. Therefore, an increase in government spending by $5 billion will increase equilibrium output by 5 * $5 billion = $25 billion.

In the Keynesian AE Model,if the Autonomous Components of Consumption,investment,government