propensities to consume. In parti For Group I of Italians, their MPC is ct = .3 For Gmup 2 of Italians, their MPC is ct = .65 Now, take the following hypothetical situation about the Italian economy: M=X-O G 500, c = 1000 + city-Jo) 1 = 200 Round to tvvo decimal places in answers below: ar: I. 2. First leys imagine all Italians have the average MPC of c, = .52 b. c. d. g. What is the equil ibrium level income? If the gov't increases spending by 200, what is the new equilibrium level of income? What is the multiplier on government spending? If government spending stays at 500, and instead they lower personal taxes by 200, why is the new equilibrium level of income? What is the multiplier on the tax reduction? Which multiplier is larger? Why are they different? Now, let's look at the effect of difference in MPC. a. Fill out the following table (your answer for all Italians should come from question I) Effect of Difference in MP C Marginal propensity to consume .52 Multiplier on government spending All Italians Group I Group 2