Answer to Question #269955 in Macroeconomics for Anna

Question

Keynesian economists would like PAE to go up by $20 billion. The mpc = 0.80 so government spending needs to go up by _____ OR taxes need to go down by _____.

 

A. $20 billion; $20 billion

B. more than $20 billion; more than $20 billion

C. less than $20 billion; less than $20 billion

D. $20 billion; more than $20 billion

Answer 1

Cotrect answer is B. more than $20 billion; more than $20 billion

Explanation

A change in PAE changes output by more than the initial change in PAE .This happens because changes in output affect consumer spending and reinforce (or multiply) the initial change in PAE.