(Solved): 4. The mulitplier effect of a change in government purchasesSuppose there is some hypothetical close ...

4. The multiplier effect of a change in government purchases Suppose there is some hypothetical dosed economy in which households spend \( 50.85 \) of each additional dollar they earn and save the remaining \( \$ 0.15 \). The marginal propensity to consume (MPC) for this economy is , and the spending multiplier for this economy is Suppose the government in this economy decides to increase government purchoses by \( \$ 300 \) billion. The increase in government spending will fead to an increase in income, creating on initial change in consumption equal to This increases income yet again, leading to a second change in consumption equal to The total change in demand resulting from the initial change in government spending is The following graph shows the aggregate demand curve \( \left(A D_{1}\right) \) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve \( \left(\mathrm{AD}_{2}\right) \) after the multiplier effect takes place. For simplicity, assume that there is no "crowding out." Hint: Be sure that the new aggregate demand curve \( \left(A D_{2}\right) \) is parallel to the initial aggregate demand curve \( \left(A D_{1}\right) \). You can see the slope of \( A D_{1} \) by selecting it on the graph.