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: Define the Keynesian multiplier. 
The Keynesian multiplier effect quantifies how an initial alteration in government expenditure or taxation influences equilibrium income. An increase in government spending stimulates aggregate demand, whereas a tax increase tends to decrease consumption.

Step 2: Evaluate the options. 
- (A) Unchanged: Incorrect. Equilibrium income will be affected by the changes in taxes and spending. 
- (B) Increased by \(\$\)1: Incorrect. The magnitude of income change is contingent on the marginal propensity to consume. 
- (C) To change depending on the value of the marginal propensity to consume: Correct. The multiplier's impact is determined by the proportion of income that is consumed (marginal propensity to consume). 
- (D) Decrease by \(\$\)1: Incorrect. The outcome is not a fixed \(\$\)1 decrease but is influenced by consumption patterns.

Step 3: Final determination. 
Option (C) is the correct choice, as the variation in equilibrium income is a function of the marginal propensity to consume.