Final answer:
Consumption must decrease by approximately $133.33 billion to achieve an initial fiscal restraint of $100 billion, given a marginal propensity to consume (MPC) of 0.75.
Step-by-step explanation:
In the context of macroeconomic theory, if the marginal propensity to consume (MPC) is 0.75, and we want to achieve an initial fiscal restraint of $100 billion, we must calculate the reduction in consumption that will lead to this decrease in aggregate demand. To find out how much consumption must decrease, we use the formula derived from the consumption function, which stipulates that an increase in income leads to an increase in consumption equivalent to the income increase multiplied by the MPC.
In this scenario, using the reverse logic, a decrease in consumption that results in a $100 billion restraint can be calculated as the fiscal change divided by the MPC. Therefore, a $100 billion restraint divided by 0.75 (the MPC) equals approximately $133.33 billion. Thus, consumption must decrease by $133.33 billion to generate the desired fiscal restraint of $100 billion.
This calculation is based on the idea that consumption and savings behaviors respond predictably to changes in income, which is a fundamental component of Keynesian economics. The relationship between income and consumption is critical for understanding how fiscal policy can impact the overall economy.