Question

In the context of the Keynesian concept of a multiplier, a \(\$\)1 increase in government spending financed by a \(\$\)1 increase in taxes will cause equilibrium income to:

• A. Unchanged
• B. Increased by $1
• C. To change depending on the value of the marginal propensity to consume
• D. Decrease by $1

Hint:

The Keynesian multiplier effect depends on the marginal propensity to consume; the greater the MPC, the greater the impact on income.

Answer 1

The Correct Option is C

 

Step 1: Understanding the Keynesian multiplier. 
The Keynesian multiplier effect refers to the change in equilibrium income resulting from an initial change in government spending or taxes. When government spending increases, it boosts aggregate demand, but an increase in taxes can reduce consumption.

Step 2: Analysis of options. 
- (A) Unchanged: This is incorrect. The equilibrium income will change due to the tax and spending changes. 
- (B) Increased by \(\$\)1: This is incorrect. The change in income depends on the marginal propensity to consume. 
- (C) To change depending on the value of the marginal propensity to consume: This is correct. The multiplier effect depends on how much of the income is consumed (marginal propensity to consume). 
- (D) Decrease by \(\$\)1: This is incorrect. The effect is not a direct \(\$\)1 decrease, but depends on the consumption behavior.

Step 3: Conclusion. 
The correct answer is (C), as the equilibrium income change depends on the marginal propensity to consume.