4. The multiplier effect of a change in government purchases Suppose there is some hypothetical closed economy in which households spend $0.80 of each additional dollar they earn and save the remaining $0.20. The marginal propensity to consume (MPC) for this economy is , and the spending multiplier for this economy is Suppose the government in this economy decides to decrease government purchases by $300 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to . This decreases income yet again, leading to a second change in consumption equal to . The total change in demand resulting from the initial change in government spending is The following graph shows the aggregate demand curve (AD,) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD2) after the multiplier effect takes place. For simplicity, assume that there is no "crowding out."Hint: Be sure that the new aggregate demand curve (AD2) is parallel to the initial aggregate demand curve (AD,). You can see the slope of AD, by selecting it on the graph. 140 A AD 135 AD 2 130 125 120 PRICE LEVEL 115 110 105 100 3 4 5 6 7 8 0 1 2 OUTPUT (Trillions of dollars)The marginal propensity to consume (MPG) for this economy is V , and the spending multiplier for this economyr is V Suppose the government in this economy decides to decrease ent purchases by $300 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumpt | to V . This decreases income yet again, leading to a second change in consumption equal to V . | change in demand resulting from the initial change in government spending is V . The following graph shows the aggregate demand curve (ADI) economy before the change in government spending. The marginal propensity to consume (MPC) for this economy is ,and the spending multiplier for this economy is Suppose the government in this economy decides to decrease government purchases by $300 billion. The decrease in 0.2 ment spending will lead to a decrease in income, creating an initial change in consumption equal to . This decreases incol 0.8 again, leading to a second change in consumption equal to . The total change in demand resulting from the initial ch government spending is 1 1.25 The following graph shows the aggregate demand curve (AD,) for this economy before the change in government spe 5Suppose the government in this economvr decides to decrease government purchases by $300 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to V . This decreases income yet again, leading to a second change in consumption equal to V . The total ch -sulting from the initial change in government spending is v . $60 billion -$1,5UO billion The following graph shows the aggregate demand curve (ADI) for this eco hange in government spending. $?50 billion $120 billion Use the green line (triangle symbol) to plot the new aggregate demand cu e multiplier effect takes place. For simplicity, assume that there is no "crowding out." $240 billion Suppose the government in this economy decides to decrease government purchases by $300 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to V . This decreases income yet again, leading to a second change in consumption equal to V . The total change in demand resulting from the initial change in government spending is v $60 billion The following graph shows the aggregat $750 billion ADI} for this economyr before the change in government spending. -$l.500 billion Use the green line {triangle symbol) to I $ b ll - ate demand curve (A192) alter the multiplier effect takes place. For simplicity, assume that - 120 i ion there is no "crowding out. " $192 billion Hint: Be sure that the new aggregate cl I2) is parallel to the initial aggregate demand curve (ADI). You can see the slope of ADI by selecting it on the graph. Suppose the goyemment in this economy decides to decrease government purchases by $300 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to V . This decreases income yet again, leading to a second change in consumption equal to V . The total change in demand resulting from the initial change in government spending is V . _$1'2 trillion aph shows the aggregate demand curve {ADI} for this economy before the change in government spending. $2.4 trillion 4 -$o_5 trillion e (triangle symbol) to plot the new aggregate demand curve {'11ng after the multiplier effect takes place. For Simplicity, assume that ding out." $1.5 trillion at the new aggregate demand curve (A402) is parallel to the initial aggregate demand curve (ADI). You can see the slope of ADI by selecting it on the graph