A study in Italy by Jappelli and Pistaferri (2014) showed the average marginal propensity to consume (MPC) is q = 0.52. They then looked at how different groups had different marginal propensities to consume. In particular: + For Group 1 of Italians, their MPC is 4 = 0.3 e For Group 2 of Italians, their MPC is c; = 0.65 Now, take the following hypothetical situation about the Italian economy: M=X=0 G =500, T, =500 C =1000 + c1(Y-Tp) =200 Round to two decimal places in answers below! Source Paper: Jappelli, T., & Pistaferri, L. (2014). Fiscal Policy and MPC Heterogeneity. = American Economic Journal: Macroeconomics, 6(4), 107-136. Average MPC First let's imagine all Italians have the average MPC of c4 =.52. Round to two decimal places! 10 points & What is the equilibrium level income? Type your answer... 10 points & If the government increases purchases by 200, what is the new equilibrium level of income? (In other words, let G = 700, and keep the rest of of the setup the same). Type your answer... 5 points g What is the multiplier on government spending? Type your answer... L 10 points P If government spending stays at 500, and instead they lower personal taxes by 200, what is the new equilibrium level of income? (In other words, let G = 500, Tp= 300, and keep the rest of of the setup the same). Type your answer... 5 points & What is the multiplier on the tax reduction? (In other words, for each dollar of tax reduction, how much did income increase?) Type your answer... n 5 points & Which multiplier is larger? choose your answer... v 10 points & Why are the multipliers different? Difference in MPC Now let's consider the relationship between the MPC and the multiplier. Fill out the following table: Effect of Difference in MPC I - O il consume spendin your answer above) _ Group 1 5 points g All Italians have a marginal propensity to consumer of .52. The multiplier on government spending for an economy with that MPC is (this answer should be the same as your multiplier on government spending above). Type your answer... n 5 points g Members of "Group 1" have a marginal propensity to consume of .3. The multiplier on government spending for an economy with that MPC is Type your answer... 5 points & Members of "Group 2" have a marginal propensity to consume of .65. The multiplier on government spending for an economy with that MPCis Type your answer... 10 points g Discuss the differences in multipliers. In words (not math!), how does the MPC relate to the multiplier? 10 points PN Group 1 and Group 2 are two mutually exclusive collections of people in the Italian economy that have different consumption habits (this could be based on geography, age, income level, education, etc.) Make an educated guess (or read the paper itself!) about who belongs to each group. Then explain your reasoning. 10 points In the above examples, | set the marginal propensity to invest at 0 and the marginal propensity to import at 0. If the marginal propensity to invest were positive (greater than zero and less than one), would the multipliers above be larger or smaller? Why? If the marginal propensity to import were positive (greater than zero and less than one), would the the multipliers above be larger or smaller? Why