If households spend 0.7 of each additional dollar they earn, the marginal propensity to consume (MPC) is 7/10, or 0.7 in decimal form. The formula for the spending multiplier is:

Each $1.00 decrease in spending leads to a $3.33 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 0.7×(−$300) billion=−$210 billion$0.7\times \left(\mathrm{-\$300}\right)\mathrm{ billion}=\mathrm{-\$210}\mathrm{ billion}$. This decrease in consumption spending decreases income yet again, leading to a second-round change in consumption equal to 0.7×(−$210) billion=−$147 billion$0.7\times \left(\mathrm{-\$210}\right)\mathrm{ billion}=\mathrm{-\$147}\mathrm{ billion}$.

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×3.3333=−$1 trillion$\mathrm{-\$300}\mathrm{ billion}\times 3.3333=\mathrm{-\$1}\mathrm{ trillion}$. Therefore, the aggregate demand curve will shift to the left by -$1 trillion.