In the Keynesian-cross model, if taxes are reduced by 250, then the equilibrium level of income:
A) increases by 250.
B) increases by more than 250.
C) decreases by 250.
D) increases, but by less than 250.

Question

Quizplus · Accepted Answer

In the Keynesian-cross model, a reduction in taxes will increase disposable income, which in turn will increase consumption spending. This increase in consumption spending will lead to a multiplied increase in aggregate demand and national income. Therefore, the equilibrium level of income will increase by more than the initial reduction in taxes, making option (B) the correct answer.

In the Keynesian-Cross Model, If Taxes Are Reduced by 250