Macroeconomics - reduction in Government spending and the effect on national income

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lauramercier
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#1
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#1
If the government were to cut their spending, what effect would this have on national income?
I need to answer this question through the use of the aggregate supply and aggregate demand framework.
Can anyone help me?
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lauramercier
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Any economic guru willing to help me? Pleeeeeassseeee
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Mike_123
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#3
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(Original post by lauramercier)
If the government were to cut their spending, what effect would this have on national income?
I need to answer this question through the use of the aggregate supply and aggregate demand framework.
Can anyone help me?
The AD function is C+I+G+X-M

so if a government cuts their spending, AD falls


using AD/AS analysis, we can shift back AD like this:
Image

as a result, national income falls (Y1 to Y2 due to equilibrium shift)
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lauramercier
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#4
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#4
(Original post by Mike_123)
The AD function is C+I+G+X-M

so if a government cuts their spending, AD falls


using AD/AS analysis, we can shift back AD like this:
Image

as a result, national income falls (Y1 to Y2 due to equilibrium shift)
Fab! Thank you!!
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MagicNMedicine
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#5
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(Original post by lauramercier)
If the government were to cut their spending, what effect would this have on national income?
I need to answer this question through the use of the aggregate supply and aggregate demand framework.
Can anyone help me?
As well as what the post above says, in terms of reducing aggregate demand, think of the potential supply effects. If government cuts investment in infrastructure, roads, railways, airports, or education, or support for science/research etc it could also reduce the aggregate supply potential of the country too.

This would mean that as well as the AD curve shifting inwards, the AS curve would shift upwards (ie at every level of Y there is a higher P).
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Olga tatarentcev
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#6
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Assume that real GDP in Aspacifica is currently equal to the potential level. (Aspacifica is a hypothetical, small economy in the Asia-Pacific region.) Next, assume that the country experiences a major slump in business investment.
Using no more than two AD-AS (also known as ADI-SRIA) diagrams, illustrate the short-run macro-economic effects of this investment shock.
Provide appropriate explanations, using full sentences.

Please help will happy with any help especially illustration and explanation Thank youuu!!
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pmc:producer
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#7
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#7
(Original post by Mike_123)
The AD function is C+I+G+X-M

so if a government cuts their spending, AD falls


using AD/AS analysis, we can shift back AD like this:
Image

as a result, national income falls (Y1 to Y2 due to equilibrium shift)
Nice of you to provide a diagram!

(Original post by lauramercier)
If the government were to cut their spending, what effect would this have on national income?
I need to answer this question through the use of the aggregate supply and aggregate demand framework.
Can anyone help me?
Obviously your questions have been answered here, it might also be worth noting the fall would be deltaG x the multiplier (derived from the consumption function), not sure of what exam you're sitting but it might score you extra points!
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samboJ
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#8
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#8
(Original post by pmc:producer)
Nice of you to provide a diagram!


Obviously your questions have been answered here, it might also be worth noting the fall would be deltaG x the multiplier (derived from the consumption function), not sure of what exam you're sitting but it might score you extra points!
deltaG x multiplier {multiplier = 1 / 1 - MPC)

Resulting effect in RNI = deltaG / 1 - MPC

Am I correct? AQA level student hoping to take econ at uni. Just interested.
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pmc:producer
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#9
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#9
(Original post by samboJ)
deltaG x multiplier {multiplier = 1 / 1 - MPC)

Resulting effect in RNI = deltaG / 1 - MPC

Am I correct? AQA level student hoping to take econ at uni. Just interested.
c1 = MPC
1 - C1 = MPS
= 1/1-C1

In your equation substitute MPC for MPS!
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