When fiscal stimulus is used to address a decrease in $\vec { C }$ that causes a reduction in AD,the increase in government spending must be the same size as the change in $\vec { C }$ .

Question

Quizplus · Accepted Answer

The increase in government spending does not have to be the same size as the change in consumption expenditure ($\vec{C}$). The multiplier effect determines the overall impact of fiscal stimulus on AD, which takes into account factors such as leakages (savings, imports) and injections (government spending). The size of the multiplier effect depends on several factors, including the marginal propensity to consume (MPC), the marginal propensity to import (MPI), and the marginal tax rate (MTR). Therefore, the relationship between changes in government spending and consumption expenditure is not a one-for-one relationship.

When Fiscal Stimulus Is Used to Address a Decrease In \vec