In the Short-Run Keynesian Model Where the Marginal Propensity to Consume

question 11

Multiple Choice

In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, transfers must be:

• A)increased by $1 billion.
• B)decreased by $1 billion.
• C)increased by $1.33 billion.
• D)decreased by $1.33 billion.

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Definitions:

Contribution Margin Ratio

The percentage of sales revenue that exceeds variable costs, indicating the portion contributing to fixed costs and profit.

Selling Price

The amount a customer pays to purchase a product or service from a business.

Operating Leverage

A measure of how revenue growth translates into growth in operating income, due to fixed costs in a company's structure.

Net Income

This is the total profit of a company after all expenses, including taxes and operating costs, have been subtracted from total revenue.