Question

Question 1: Suppose that there is a decrease in government spending of $70 billion, and that the government spending multiplier is 2. How does the real GDP change? How is this calculated.

Question 2: Suppose that there is an increase in taxes of $42 billion, and that the tax multiplier is -1.5. How does the real GDP change? How is this calculated.

Answer 1

1. Decreases in government spending shifts the aggregate demand curve to the left hence lowering real GDP.

Change in aggregate demand (∆Y) = initial change in government spending (∆G) x spending multiplier= $70billion$\times$2=$140billion

2. Increases in taxes that shift aggregate demand left and this will lower the real GDP.

$42 bilion $\times$ -1,5 = $63 billion movement is left because consumers have less money to spend.