Assume the marginal propensity to consume is 0.8. How will a decrease in taxes of $100 billion and a decrease in government spending of $100 billion affect aggregate demand?

A. Aggregate demand will decrease by $900 billion.
B. Aggregate demand will decrease by $500 billion.
C. Aggregate demand will decrease by $400 billion.
D. Aggregate demand will decrease by $100 billion.
E Aggregate demand will not change.

The effect of a decrease in taxes of $100 billion and a decrease in government spending of $100 billion is: D. Aggregate demand will decrease by $100 billion.

What is an aggregate demand?

An aggregate demand (AD) can be defined as the total quantity of finished goods (final products) and services that are being demanded by consumers at all possible price levels in a particular economy and at a specific period of time.

Generally, there are four (4) main factors that causes a shift in aggregate demand (AD) and these include the following:

Consumption

Investment

Net exports

Government spending

In conclusion, aggregate demand (AD) would decrease by $100 billion due to a decrease in government spending of $100 billion.

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