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

When government expenditure on goods and services decreases, it means that the government is spending less money in the economy. As a result, the people who were benefiting from that expenditure (such as the workers who were employed to provide those goods and services) will have a decrease in their income. This decrease in income will then lead to a decrease in consumption expenditures by those workers, which will further decrease aggregate demand in the economy. This concept is called the induced effect, and it means that a decrease in government expenditure on goods and services leads to an even larger decrease in aggregate demand.

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