If households spend 0.85 of each additional dollar they earn, the marginal propensity to consume (MPC) is 17/20, or 0.85 in decimal form. The formula for the spending multiplier is:

Each $1.00 decrease in spending leads to a $6.67 decrease in aggregate demand by way of the multiplier effect. In this case, when the government decreases purchases by $300 billion, aggregate demand initially falls by $300 billion. The decrease in government purchases decreases income by $300 billion, causing a first-round change in consumption equal to 0.85×(−$300) billion=−$255 billion$0.85\times \left(\mathrm{-\$300}\right)\mathrm{ billion}=\mathrm{-\$255}\mathrm{ billion}$. This decrease in consumption spending decreases income yet again, leading to a second-round change in consumption equal to 0.85×(−$255) billion=−$216.8 billion$0.85\times \left(\mathrm{-\$255}\right)\mathrm{ billion}=\mathrm{-\$216.8}\mathrm{ billion}$.

The total change in demand is given by the following formula:

By way of the multiplier effect, the decrease in government purchases decreases total demand at each price level by −$300 billion×6.6667=−$2 trillion$\mathrm{-\$300}\mathrm{ billion}\times 6.6667=\mathrm{-\$2}\mathrm{ trillion}$. Therefore, the aggregate demand curve will shift to the left by -$2 trillion.