In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion decrease in taxes increases planned expenditures by and increases the equilibrium level of income by .
A)$1 billion; more than $1 billion
B)$.75 billion; more than $.75 billion
C)$.75 billion; $.75 billion
D)$1 billion; $1 billion

Question

Quizplus · Accepted Answer

A $1 billion decrease in taxes increases disposable income by $1 billion, leading to a $0.75 billion increase in consumption (since MPC = 0.75). The multiplier effect then increases the equilibrium level of income by more than $0.75 billion.

In the Keynesian-Cross Model, If the MPC Equals 0