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

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 {MPCJ for this economy is V , and the oversimplified multiplier for this economy is V. Suppose the government in this economy decides to decrease government purchases by $350 billion. The decrease in government purchases will lead to a decrease in incomef generating an initial change in consumption equal to V . This decreases income yet againf causing a second change in consumption equal to V . The total change in demand resulting from the initial change in government spending is V . The following graph shows the aggregate demand curve {11.01) for this economy before the change in government spending. Use the green line {triangle symbol) to plot the new aggregate demand curve { 11.03} after the multiplier effect takes place. For Simplicity, assume that there is no \"crowding out.\" Hint: Be sure that the new aggregate demand curve {4'1ng is parallel to the initial aggregate demand curve (11.01). You can see the slope of 11.01 by selecting it on the graph. (9 150 ~ 145 - I40 :"-\\D2 '35 '30 I25 '20 PRICE LEVEL "5 "O '65 IOO REAL GDP (Trillipns of dollars) 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. (?) 150 A 145 140 AD 2 AD 135 130 125 PRICE LEVEL 120 115 110 105 100 2 3 5 6 7 8 9 10 REAL GDP (Trillions of dollars)