MPC=0.7520045-Degree Line180New AE Line180140120New Equilibrium100806040AE Line2020406080100120140160180200REAL INCOME (Billions of dollars)In the first economy (with MPC = 0.5), the $20 billion increase in planned investment causes equilibrium income to increase by $billion. In thesecond economy (with MPC = 0.75), the $20 billion increase in planned investment causes equilibrium income to increase by sbillion.Therefore, a lower MPC is associated with amultiplier.Now, confirm your graphical analysis algebraically using the formula for the multiplier:Multiplier = H MICFor the first economy with an MPC of 0.5, the effect of the $20 billion increase in planned investment becomes the following:Change in Equilibrium Real IncomeChange in Planned Expenditure x Multiplier%3DUsing the same method, the multiplier for the second economy isPLANNED EXPENDITURE (Billions of dollars)I| |||| 7. The multiplier and the MPCConsider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium withreal income and planned expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxes thatchange with income. The grey lines show the 45-degree line on each graph.The first economy's MPC is 0.5. Therefore, its initial planned expenditure line has a slope of 0.5 and passes through the point (100o, 100).The second economy's MPC is 0.75. Therefore, its initial planned expenditure line has a slope of 0.75 and passes through the point (100, 100).Now, suppose there is an increase of $20 billion in planned investment in each economy.Place a green line (triangle symbol) on each of the preceding graphs to indicate the new planned expenditure line for each economy. Then place ablack point (plus symbol) on each graph showing the new level of equilibrium income. (Hint: You can see the slope and vertical axis intercept of a lineon the graph by selecting it.)MPC=0.545-Degree Line200180New AE Line160140120New Equilibrium1008060AE Line2020406080100 120140160180200REAL INCOME (Billions of dollars)PLANNED EXPE NDITURE (Billions of dollars)

We are going to use concepts such as Aggregate expenditure and Planned expenditure to answer this question.Answer 1) MPC for first economy =0.5 We know that, Multiplier for the first economy = 1/(1-MPC) = 1/0.5 = 2 Therefore, if planned investment increases by $20 billion then change in equilibrium income can be calculated as below. Change in Equilibrium Income for the first economy = Multiplier for the first economy* Change in planned investment = 2*(+$ 20 bn) = $40 bn. Answer 2) MPC for second economy =0.75 We know that, Multiplier for the second economy = 1/(1-MPC) = 1/0.25 = 4 Change in Equilibrium Income for the second economy = Multiplier for the second economy* Change in planned investment = 4*(+$ 20 bn) = $80 bn. Answer 3) Multiplier =(1/(1-MPC)), therefore, if MPC increases then multiplier will decrease; similarly, if MPC decreases then multiplier will increase. Hence, lower MPC is associated with higher multiplier.

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MPC-0.75 45-Degree Line 200 180 New AE Line 100 140 120 New Equilibrium 100 80 60 40 AE Line 20 o 20 40 0 80 100 120 140 180 180 200 REAL INCOME (Billins of dollars) In the first economy (with MPC = 0.5), the $20 billion increase in planned investment causes equilibrium income to increase by S second economy (with MPC = 0.75), the $20 billion increase in planned investment causes equilibrium income to increase by S | billion. In the billion. Therefore, a lower MPC is associated with a multiplier. Now, confirm your graphical analysis algebraically using the formula for the multiplier: Multiplier = AC For the first economy with an MPC of 0.5, the effect of the $20 billion increase in planned investment becomes the following: Change in Equilibrium Real Income = Change in Planned Expenditure × Multiplier Using the same method, the multiplier for the second economy is PLANNED EXPENDITURE (Billions of dollars) I| ||||