Final answer:
The increase in government spending in Country A will lead to a higher new equilibrium level of income than the tax cut in Country B, due to the direct effect of government spending and the higher multiplier effect in the Keynesian model.
Step-by-step explanation:
The student's question pertains to the Keynesian-cross model and the impact of fiscal policy on the equilibrium level of income in two identical countries with an MPC (marginal propensity to consume) of 0.9. In Country A, which increases government spending by $2 billion, the multiplier effect will be more pronounced than in Country B, which cuts taxes by the same amount. This is because a government spending increase directly enters the income stream, whereas a tax cut only indirectly affects spending, depending on the MPC.
The multiplier in the Keynesian model is represented as 1 / (1 - MPC). Since the MPC is 0.9 for both countries, the multiplier would be 10 (1 / (1 - 0.9)). In Country A, the increase in government spending would result in a full multiplier effect, leading to an increase in the equilibrium level of income by $20 billion ($2 billion * 10). Conversely, the tax cut in Country B would result in less than $20 billion increase in equilibrium level of income, due to the portion of the tax savings that would not be spent (represented by the MPS, marginal propensity to save).