(Solved): 4. The multiplier effect of a change in government purchases Suppose there is some hypothetical dos ...

4. The multiplier effect of a change in government purchases Suppose there is some hypothetical dosed economy in which households spend \( \$ 0.80 \) of each additional dollar they eam and save the rennaining \( \$ 0.20 \). The marginal propensity to consume (MPC) for this economy is and the spending multiplier for this economy is Suppose the povemment in this economy decides to decrease government purchasos by 3300 bililion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to. This decreases income yet again, leading to a 5econd change in consumption equal to The cotal change in demand resulting from the initial change in government spending is a The following oraph shows the aggregate demand curve \( \left(A D_{1}\right) \) for this economy before the change in eovernment spending. there it no "crowcing out, Hint: Be sure that the ned aggregate dernand curve \( \left(A D_{2}\right) \) is parallel to the-initial agarepate demand curve \( (A D) \). You can see the slope of \( A D \). ti Delectilg it on the graph. Suppose the government in this economy decides to decrease qovernment purchases by \( \$ 300 \) billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to This decreases income yet again, feading to a second change in consumption equal to The total change in demand resulting from the initial change in govemment spending is The following graph shows the aggregate demand curve \( \left(A D_{1}\right) \) for this econorny before the change in qovernment spending. Use the green line (trangle symbol) to plot the new aggregate demand curve \( \left(A D_{2}\right) \) after the multiplier effect takes place. Far amplicit, attume mat there is no "orowding out," Hint: Be sure that the new agoregate demand curve \( \left(A D_{2}\right) \) is parallel to the initial aggregate demand curve \( \left(A D_{1}\right) \). You can sine the slope af \( A D_{1} \) br selecting it on the graph, Hint: Be sure that the new aggregate demand curve \( \left(A D_{2}\right) \) is parallel to the initial aggregate detrand curve \( \left(A D_{1}\right)_{\text {. You can see the slope of }}^{A D} \) by by selecting it on the graph.