The following graph plots the planned expenditure line (PE) for an economy in which current equilibrium income is $400 billion and the full-employment income level is $250 billion. The graph also plots a 45 degree line on the same coordinate pair. REAL EXPENDITURE (Bilons of dollars). 000 700 45-degree ling 600 500 400 300 200 100 Full-Employment Income 0 100 200 300 400 500 INCOME (Bilions of dollars) PE 600 700 800 PE The economy is experiencing require a s The absolute value of the income gap is equal to s billion. Closing the gap would billion in government spending. Thus the value of the multiplier for this economy is On the graph, shift the PE line to show the change in the planned expenditure line necessary to close the income gap. Tools ps S 9. Question 6. The multiplier effect Consider a hypothetical economy. Households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The multiplier for this economy is Suppose government purchases, G, in this economy decrease by $250 billion. The decrease in G will lead to a decrease in income, generating a decrease in consumption that decreases income yet again, and so on. Fill in the following table to show the impact of the change in G on the first two rounds of consumption spending and, eventually, on national income. Note: Use negative signs if numbers are negative. Change in G = -$250 billion First Change in Consumption = $ Second Change in Consumption = $ billion billion Total Change in Income = $ billion Now consider the impact of a similar change in taxes. The (absolute value) of the tax multiplier in this question will be change by -$250 billion, spending will change by $ billion. Based on your results, this Keynesian model predicts that a change in initial change in planned expenditures is of the same magnitude. ; thus, if taxes will have the larger effect on income, given the