Suppose that when income taxes are reduced by $400 billion, households increase consumption
By 80% of the resulting change in disposable income. Suppose also that the multiplier is 2. At a given price level, the aggregate demand curve shifts to the right by

Question

Quizplus · Accepted Answer

The multiplier effect is 2, so the increase in aggregate demand is 2 * $400 billion = $800 billion. However, households only increase consumption by 80% of the increase in disposable income, so the actual increase in aggregate demand is 0.8 * $800 billion = $640 billion.

Suppose That When Income Taxes Are Reduced by $400 Billion