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

Question

Quizplus · Accepted Answer

In the Keynesian-cross model, an increase in government spending directly increases planned expenditures by the same amount. With an MPC (marginal propensity to consume) of 0.75, the multiplier effect is 1/(1-MPC) = 4, meaning a $1 billion increase in government spending increases the equilibrium level of income by $4 billion, which is more than $1 billion.

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