116k views
5 votes
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 ______.

1 Answer

4 votes

Answer:

$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

User Tu Tran
by
8.5k points
Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.