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

Question

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In the Keynesian model, the tax multiplier is smaller than the spending multiplier. With a marginal propensity to consume of 0.5, the tax multiplier is -1. Therefore, to close a $1 billion gap, taxes must be decreased by $2 billion to achieve the desired increase in aggregate demand.

In the Basic Keynesian Model Where the Marginal Propensity to Consume