(Solved): 4. The multiplier effect of a change in government purchases Consider a hypothetical closed economy ...

4. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend \( \$ 0.70 \) of each additional dollar they earm and save the remaining \( \$ 0.30 \). The marginal propensity to consume (MPC) for this economy is , and the spending multiplier for this econorny is Suppose the government in this economy decides to increase government purchases by \( \$ 300 \) billion. The increase in governerent purchases will lead to an incresse in income, generating an insial change in consumption equal to This increases income yet again, causing a second change in consumption equal to The totel change in demand resulting from the initial change in government spending is The following groph 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 \( \left(A D_{2}\right) \) after the multiplier effect fakes place. For simplicity, assume that there is no "crowding out." Hint: Be sure that the new agsregate demand curve \( \left(A D_{2}\right) \) is parallel to the initial aggregate demand curve \( \left(A D_{1}\right) \). You can see the siope of \( A D_{1} \) by selecting it on the graph.