Suppose the government in this economy decides to decrease government purchases by $300 billion. The decrease in government purchases will lead to a decrease in income, generating an initial change in consumption equal to:

A) - $1,000 billion

B) - $90 billion

C) - $210 billion

D) - $500 billion

E) - $105 billion

This decreases income yet again, causing a second change in consumption equal to:

A) - $1,000 billion

B) - $90 billion

C) - $210 billion

D) - $500 billion

E) - $107 billion

The total change in demand resulting from the initial change in government spending is:

A) - $0.6 trillion

B) - $0.7 trillion

C) - $2.7 trillion

D) - $1 trillion

initial change in consumption = $210 billion

correct option C) - $210 billion

Explanation:

given data

purchases amount = $300 billion

we consider here marginal propensity to consume is = 0.7

and oversimplified multiplier = 3.33

solution

we get here initial change in consumption tat is

initial change in consumption is = MPC * purchases amount ... 1

initial change in consumption = 0.7 * $300

initial change in consumption = $210 billion

and

here decreases income again causing of change in consumption that si decreases income = initial change * MPC ... 2

decreases income = $210 billion * 0.7

decreases income = $147 billion

and

now we know total change in demand by initial change that is

total change in demand = oversimplified multiplier * purchases amount

total change in demand = $300 * 3.33

total change in demand = $1 trillion