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Word Count: 388
A decrease in government spending or a leftward shift in the aggregate demand curve will initially reduce total spending by the amount of the decrease Because all spending becomes someone elses income income will decrease With less income people will decrease consumption spending Thus the initial reduction in government spending will have a multiplied effect on total spending Since spending is now less than output inventories in investment will increase and businesses will have fewer incentives to produce Aggregate quantity supplied will be greater than aggregate quantity demanded and output and prices will fall as business try to sell of their excess inventories These lower prices will cause aggregate quantity demanded to increase and aggregate quantity supplied to decrease This process continues until the two are once again equal A new short-term equilibrium will be reached at a lower price and quantity than before the decrease in spending The decrease in spending will also affect unemployment As businesses lower output due to lower prices the demand for labor will fall and workers will be laid off At the same time lower prices will reduce inflation In the long-run the fall in demand for labor will reduce wages as laborers are willing to work for less This will lower costs of production and aggregate supply will increase This will lead to a decrease in prices and an increase in aggregate quantity demand If prices are lower in the US foreign demand for US goods will increase and US demand for foreign goods will decrease Thus exports will increase and imports will decrease causing net export spending to increase The real value of wealth will have increased for consumers since they can buy more goods and services for lower prices and consumption spending will increase Also lower prices reduce the demand for money which causes interest rates to fall Lower interest rates will cause investment spending to increase since the opportunity cost is less These
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