7. The multiplier and the MPC

Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real GDP and aggregate expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxes that change with income. The grey lines show the 45-degree line on each graph.

The first economy's MPC is 0.5. Therefore, its initial aggregate expenditure line has a slope of 0.5 and passes through the point (100, 100).

The second economy's MPC is 0.70. Therefore, its initial aggregate expenditure line has a slope of 0.70 and passes through the point (100, 100).

Now, suppose there is an increase of $30 billion in investment in each economy.

Place a green line (triangle symbol) on each of the previous graphs to indicate the new aggregate expenditure line for each economy. Then place a black point (plus symbol) on each graph showing the new level of equilibrium output. (Hint: You can see the slope and vertical axis intercept of a line on the graph by selecting it.)

MPC=0.5 200 T 45-Degree Line A 180 New AE Line 180 140 120 New Equilibrium AGGREGATE EXPENDITURE (Billions of dollars) 100 80 80 AE Line 40 20 20 40 60 80 100 120 140 160 180 200 REAL GDP (Billions of dollars)MPC=0.70 200 45-Degree Line- A 180 New AE Line 160 140 120 New Equilibrium 100 AGGREGATE EXPENDITURE (Billions of dollars) 80 60 40 AE Line 20 20 40 60 80 100 120 140 160 180 200 REAL GDP (Billions of dollars)\fChange in Equilibrium Output = Change in Aggregate Expenditure x Multiplier = X = Using the same method, the multiplier for the second economy is