Below is some data for a hypothetical economy:

-Refer to the information above to answer this question.If government decreased both its spending and taxes by $45,how would equilibrium GDP change?
A)It would increase by $60.
B)It would decrease by $60.
C)It would increase by $30.
D)It would decrease by $30.

Question

Below is some data for a hypothetical economy:
 
-Refer to the information above to answer this question.If government decreased both its spending and taxes by $45,how would equilibrium GDP change?
A)It would increase by $60. 
B)It would decrease by $60. 
C)It would increase by $30. 
D)It would decrease by $30.

Quizplus · Accepted Answer

Since government spending and taxes are both decreasing by the same amount, the level of aggregate demand will decrease by $45 ($90 decrease in government spending and taxes). The decrease in aggregate demand will cause a decrease in equilibrium GDP. The magnitude of the decrease in GDP will be less than $45 due to the multiplier effect. The exact amount of decrease in GDP will depend on the size of the multiplier. Therefore, the best choice is D, which indicates that equilibrium GDP will decrease by $30.

Below Is Some Data for a Hypothetical Economy