If the government reduces its purchases of goods and services by $100 billion, total economic activity will:

Question

Quizplus · Accepted Answer

This is due to the multiplier effect. When the government reduces its spending, not only does the initial amount of spending decrease, but this reduction also leads to a decrease in income for those who would have received the government spending. As a result, their spending decreases as well, leading to further decreases in income and spending in the economy. This chain reaction means the total decrease in economic activity is more than the initial $100 billion.

If the Government Reduces Its Purchases of Goods and Services