In the basic Keynesian model where the marginal propensity to consume is 0.5,government purchases must be ________,to close a recessionary gap resulting from a $1 billion decrease in autonomous consumption.

Question

Quizplus · Accepted Answer

Government purchases must be increased by $1 billion to close a recessionary gap resulting from a $1 billion decrease in autonomous consumption. This is because the multiplier effect will amplify the initial decrease in consumption, leading to a larger decrease in output and income. Increasing government purchases by $1 billion will offset this decrease and bring the economy back to equilibrium.

In the Basic Keynesian Model Where the Marginal Propensity to Consume