Consider a hypothetical closed economy in which households spend $0.65 of each additional dollar they earn and save the remaining $0.35.

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 todecreasegovernment purchases by $350 billion. The decrease in government purchases will lead to a decrease in income, generating an initial change in consumption equal to______. This decreases income yet again, causing 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

1

AD1) for this economy before the change in government spending.

Use the green line (triangle symbol) to plot the new aggregate demand curve (AD

2

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 (AD

2

AD2) is parallel to the initial aggregate demand curve (AD

1

AD1). You can see the slope ofAD

1

AD1by selecting it on the graph.