100 AS AD’ AD 1000 1400 REAL OUTPUT The graph above shows the aggregate supply (AS) and aggregate demand (AD) curves for an economy. a. Calculate the spending multiplier if AD shifts to AD' as a result of an increase in government spending of $100. b. Will a decrease in income taxes have to be larger, smaller, or equal to $100 in order to shift the AD by the same amount as the $100 increase in government spending? Explain. c. If the marginal propensity to save decreases, will the spending multiplier increase, decrease, or remain unchanged? PRICE LEVEL

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