A $100 million decrease in government expenditure on goods and services leads to an even larger decrease in aggregate demand because of

Question

Quizplus · Accepted Answer

The induced changes in consumption expenditures result from a decrease in government expenditure due to the decrease in demand for goods and services from the government. This decrease in demand for goods and services by the government can lead to a decrease in production and employment, which can further reduce consumer demand for goods and services, thereby decreasing aggregate demand. As a result, a $100 million decrease in government expenditure can have a larger impact on aggregate demand than the initial reduction.

A $100 Million Decrease in Government Expenditure on Goods and Services