When the government decides to decrease government purchases by $250 billion, this will lead to a $175 billion decrease in income.
From the information, the government decides to decrease government purchases by $250 billion. The decrease in income will be:
= $250 × 0.7
= $175 billion
This decrease in income yet again will cause a second change in consumption equal to:
= $175 × 0.7
= $122.5 billion
The total change in demand resulting from the initial change in government spending will be:
= $250 × (1/30%)
= $250 × 3.33
= $833 billion
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