Suppose the MPC = 0.60 and government purchases increase by $40 billion.In Keynesian theory,which of the following is true?
A) The TE curve shifts downward by $40 billion and total spending decreases by $40 billion.
B) The TE curve shifts upward by $40 billion,and total spending increases by $40 billion.
C) The TE curve shifts downward by $40 billion,and total spending decreases by $100 billion.
D) The TE curve shifts upward by $40 billion,and total spending increases by $100 billion.

Question

Quizplus · Accepted Answer

In Keynesian theory, an increase in government purchases shifts the Total Expenditure (TE) curve upward by the amount of the increase. With a marginal propensity to consume (MPC) of 0.60, the multiplier is 1/(1-MPC) = 2.5. Therefore, a $40 billion increase in government purchases leads to a total increase in spending of $40 billion * 2.5 = $100 billion.