Answer to Question #100530 in Macroeconomics for Bill

Question

In the Keynesian-cross model, if the MPC equals 0.75, then a $3 billion decrease in taxes increases planned expenditures by ______ and increases the equilibrium level of income by ______

I don’t know how to solve this question. Assistance would be greatly appreciated.

Answer 1

Decrease in taxes is $3 billion. Then the planned expenditures would increase by $3 billion as a result of tax decrease. The decrease in taxes is the finances increase in expenditures and as a result the level of income increases by $3 billion.