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Suppose the government in this economy decides to increase government purchases by $250 billion. the increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to . this increases income yet again, causing a second change in consumption equal to . the total change in demand resulting from the initial change in government spending is .

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ogorwyne

When the government decides to reduce government purchases by $250 billion, this will bring about a $175 billion increase in income.

How to calculate the change in income

The increase in the income of the government would be

= $250 × 0.7

= $175 billion

This would then cause a change in income that is

= $175 billion × 0.7

= $122.5 b

The overall change in demand resulting from the initial change in is going to be

= $250 × 3.33 = $833 b

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