Question

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 ______.

Answer 1

$1 billion spending increased expenditure by $1 billion and increase income by $4 billion

Step-by-step explanation:

Spending Multiplier = \frac{1}{1 - MPC}

= \frac{1}{1 - 0.75}

= \frac{1}{0.25} = 4. Therefore,

$1 billion spending increased expenditure by $1 billion and increase income by $4 billion because

income = increment in spending * multiplier

here

increment in spending is $1 billion hence income will be more than spending