Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real income and planned 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 planned expenditure line has a slope of 0.5 and passes through the point (100, 100). The second economy's MPC is 0.75. Therefore, its initial planned expenditure line has a slope of 0.75 and passes through the point (100, 100). Now, suppose there is an increase of $20 billion in planned investment in each economy. Place a green line (triangle symbol) on each of the preceding graphs to indicate the new planned expenditure line for each economy. Then place a black paint (plus symbol) on each graph showing the new level of equilibrium income. (Hint: You can see the slope and vertical axis intercept of a line on the graph by selecting it.) (\"D MPC=IJ.5 200 45-Deg ree Line + 130 160 New AE Line 140 ' 1' 120 New Equilibrium 100 - 80 60 PLANNED EXPENDITURE (Billions of dollars) + I I I I I I I I I o 20 4o 60 so 100 120 140 160 180 200 REAL INCOME (Billions of dollars) MPC=U.75 zoo 45-Degree Line HQ 130 169 New AE Line 14a ' '!' 129 New Equilibrium 100 --------- PLANNED EXPENDITURE (Billions of dollars) 3 8 8 N O + I I I I I I I I I 0 20 40 60 so 100 120 140 160 180 200 REAL INCOME (Billions of dollars) In the first economy (with MPC = 0.5), the $20 billion increase in planned investment causes equilibrium income to increase by billion. In the second economy (with MPC = 0.75), the $20 billion increase in planned investment causes equilibrium income to increase by billion. Therefore, a lower MPC is associated with a v multiplier. Now, confirm your graphical analysis algebraically using the formula for the multiplier: Multiplier For the first economy with an MPC of 0.5, the effect of the $20 billion increase in planned investment becomes the following: Change in Equilibrium Real Income = Change in Planned Expenditure X Multiplier = X = X Using the same method, the multiplier for the second economy is Grade It Now Save & Continue Continue without saving