QuestionJuly 21, 2025

If the government purchases multiplier is 4 and a change in government spending leads to a 500 million decrease in aggregate demand, we can conclude that government spending decreased by 125 million. 125 taxes increased by 500 million. taxes decreased by 100 million. government spending decreased by 2,000 million.

If the government purchases multiplier is 4 and a change in government spending leads to a 500 million decrease in aggregate demand, we can conclude that government spending decreased by 125 million. 125 taxes increased by 500 million. taxes decreased by 100 million. government spending decreased by 2,000 million.
If the government purchases multiplier is 4 and a change in government spending leads
to a 500 million decrease in aggregate demand, we can conclude that
government spending decreased by 125 million. 125
taxes increased by 500 million.
taxes decreased by 100 million.
government spending decreased by 2,000 million.

Solution
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Answer

Government spending decreased by \ 125 million. Explanation 1. Identify the formula for government purchases multiplier The government purchases multiplier is defined as \frac{\Delta \text{AD}}{\Delta \text{G}}, where \Delta \text{AD} is the change in aggregate demand and \Delta \text{G} is the change in government spending. 2. Apply the given multiplier value Given that the multiplier is 4, we have 4 = \frac{-500}{\Delta \text{G}}. 3. Solve for the change in government spending Rearrange to find \Delta \text{G} = \frac{-500}{4} = -125 million.

Explanation

1. Identify the formula for government purchases multiplier<br /> The government purchases multiplier is defined as $\frac{\Delta \text{AD}}{\Delta \text{G}}$, where $\Delta \text{AD}$ is the change in aggregate demand and $\Delta \text{G}$ is the change in government spending.<br /><br />2. Apply the given multiplier value<br /> Given that the multiplier is 4, we have $4 = \frac{-500}{\Delta \text{G}}$.<br /><br />3. Solve for the change in government spending<br /> Rearrange to find $\Delta \text{G} = \frac{-500}{4} = -125$ million.
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