In a simple macro model with government and demand- determined output, to reduce equilibrium national income by $100 billion, G must be
A)raised by $100 billion times the simple multiplier.
B)lowered by $100 billion divided by the simple multiplier.
C)lowered by $100 billion.
D)lowered by $100 billion times the simple multiplier.
E)raised by $100 billion divided by the simple multiplier.

Question

Quizplus · Accepted Answer

In a demand-determined model, the change in national income is determined by the simple multiplier. The simple multiplier is calculated as 1/(1-MPC) where MPC (marginal propensity to consume) is the proportion of an additional dollar of income spent on consumption. Therefore, to reduce equilibrium national income by $100 billion, we need to lower G by $100 billion divided by the simple multiplier. This is because a decrease in G will lead to a decrease in aggregate demand, which will be multiplied by the simple multiplier to determine the change in national income.

In a Simple Macro Model with Government and Demand- Determined