Consider the Following Diagram

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The Answer is The total impact of the decrease of 50 of government spending is a leftward shift of the AD curve from AD₀ to AD₁.This shift occurs as a result of two things.The initial effect is the decrease in government spending of 50.This can be viewed as the movement along the P₀ line from point A to point B.As a result of the initial decrease in spending,the multiplier process takes over.The multiplier effect is illustrated by the movement along the P₀ price line from point B to point C.Using a multiplier of 3 this results in a total drop in real output (A to C)of 150.

The total impact of the decrease of 50 of government spending is a leftward shift of the AD curve from AD<sub>0</sub> to AD<sub>1</sub>.This shift occurs as a result of two things.The initial effect is the decrease in government spending of 50.This can be viewed as the movement along the P<sub>0</sub> line from point A to point B.As a result of the initial decrease in spending,the multiplier process takes over.The multiplier effect is illustrated by the movement along the P<sub>0</sub> price line from point B to point C.Using a multiplier of 3 this results in a total drop in real output (A to C)of 150.

Consider the Following Diagram

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Consider the Following Diagram

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Correct Answer:
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