Consider a hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25.The marginal propensity to consume (MPC) for this economy isand the spending multiplier for this economy isSuppose the government in this economy decides to increase government purchases by $250 billion. The increase in government purchases will leadto an increase in income, generating an initial change in consumption equal to▼. This increases income yet again, causing asecond change in consumption equal to. The total change in demand resulting from the initial change in government spending isThe following graph shows the aggregate demand curve (AD₁) for this economy before the change in government spending.Use the green line (triangle symbol) to plot the new aggregate demand curve (AD2) after the multiplier effect takes place. For simplicity, assume thatthere is no "crowding out."Hint: Be sure that the new aggregate demand curve (AD2) is parallel to the initial aggregate demand curve (AD1). You can see the slope of AD₁ byselecting it on the graph.Friday,140 TGO4/2 Hint: Be sure that the new aggregate demand curve (AD2) is parallel to the initial aggregate demand curve (AD₁). You can see the slope of AD₁ byselecting it on the graph.140ADAD2Bongo1:09 PM4/29/2022PRICE LEVEL13513012512015115110105100024567Cal

Here MPC = 0.75 And MPS = 0.25 Multiplier = 1 / MPS = 4 Now, Increase in government spending = 250…

Answered: Consider a hypothetical closed economy…

Consider a hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. The marginal propensity to consume (MPC) for this

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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