In the Keynesian-cross model,if the MPC equals .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) $.75 billion; more than $.75 billion
C) $.75 billion; $.75 billion
D) $1 billion; $1 billion

Question

Quizplus · Accepted Answer

If the MPC(marginal propensity to consume) is 0.75, it means that each additional dollar of income will be spent by 0.75 cents. Thus, an increase of $1 billion in government spending will increase the aggregate expenditure by $1 billion (initial spending) + $0.75 billion (induced spending) = $1.75 billion. In the Keynesian-cross model, equilibrium output is determined by the intersection of aggregate expenditure and the 45-degree line. Therefore, the increase in planned expenditure of $1.75 billion will lead to an increase in equilibrium output of more than $1 billion because of the multiplier effect.

In the Keynesian-Cross Model,if the MPC Equals