5 . The multiplier effect of a change in government purchases Suppose there is some hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. 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 $250 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to W . This decreases income yet again, leading to a second change in consumption equal to W . The total change in demand resulting from the initial change in government spending is w 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 (AD; ) after the multiplier effect takes place. For simplicity, assume that there is no "crowding out." Hint: Be sure that the new aggregate demand curve (AD;) is parallel to the initial aggregate demand curve (AD). You can see the slope of AD; by selecting it on the graph.