Macro Foundations · intermediate
What moves on the Aggregate Supply – Aggregate Demand diagram
Cutting G reduces AD directly, amplified by the multipliermultiplierThe amount total output changes per dollar of initial spending change, powered by respending: 1/(1−MPC) in the simplest case., shifting AD left.
Start at equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change..
The government cuts spending to reduce its deficit. G falls.
The fall in G is amplified through the multipliermultiplierThe amount total output changes per dollar of initial spending change, powered by respending: 1/(1−MPC) in the simplest case.. AD shifts left strongly.
New equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change.: lower output and price level; a recessionary gap opens if the economy was at potential.
Examiners ask this as: austerity, spending cuts, budget cuts, fiscal consolidation, deficit reduction.
Other scenarios on Aggregate Supply – Aggregate Demand