In the short run, when government purchases decrease, real GDP falls by more than the change in government purchases because
A)prices increase.
B)taxes increase.
C)consumption decreases.
D)investment decreases.
E)taxes decrease.

Question

Quizplus · Accepted Answer

When government purchases decrease, it leads to a decrease in overall spending in the economy, which can result in a decrease in consumption. This decrease in consumption leads to a decrease in aggregate demand, ultimately causing a larger decrease in real GDP than the initial decrease in government purchases.

In the Short Run, When Government Purchases Decrease, Real GDP