Right click on image and click on open image in new tab to see the full and clear image. Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real GDP and total expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxes that change with income. The grey lines show the 45-degree line on each graph.The first economy's MPC is 0.5. Therefore, its initial total expenditure line has a slope of 0.5 and passes through the point (100, 100).The second economy's MPC is 0.75. Therefore, its initial total expenditure line has a slope of 0.75 and passes through the point (100, 100).Now, suppose there is a decrease of $20 billion in investment in each economy.Place a green line (triangle symbol) on each of the previous graphs to indicate the new total expenditure line for each economy. Then place a black point (plus symbol) on each graph showing the new level of equilibrium output. (Hint: You can see the slope and vertical axis intercept of a line on the graph by selecting it.) Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibriumwith real GDP and total expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxesthat change with income. The grey lines show the 45-degree line on each graph.The first economy's MPC is 0.5. Therefore, its initial total expenditure line has a slope of 0.5 and passes through the point (100, 100).The second economy's MPC is 0.75. Therefore, its initial total expenditure line has a slope of 0.75 and passes through the point (100, 100).Now, suppose there is a decrease of $20 billion in investment in each economy.Place a green line (triangle symbol) on each of the previous graphs to indicate the new total expenditure line for each economy. Then place a black point(plus symbol) on each graph showing the new level of equilibrium output. (Hint: You can see the slope and vertical axis intercept of a line on the graphby selecting it.)(?(?)МРC-0.5МРC-0.7520045-Degree Line45-Degree Line200180180New AE LineNew AE Line160160E 140140120New EquilibriumNew Equilibrium1201001008060AE Line40AE Line202020406080100120140 18018020020406080100120140180180200REAL GDP (Billions of dollars)REAL GDP (Billions of dollars)In the first economy (with MPC = 0.5), the $20 billion decrease in investment causes equilibrium output to decrease by $billion. In thesecond economy (with MPC = 0.75), the $20 billion decrease in investment causes equilibrium output to decrease by $billion. Therefore,a lower MPC is associated with amultiplier.(higher or lower?)Now, confirm your graphical analysis algebraically using the oversimplified multiplier formula:Multiplier =1-MBGFor the first economy, with an MPC of 0.5, the effect of the $20 billion decrease in investment is as follows:multiplier options:Change in Equilibrium Output = Change in Total Expenditure x Multiplier1 x (1– 0.5)Using the same method, the multiplier for the second economy is1x (1– 0.75)0.75change in total expenditureoptions:24+$20 billion0.25+$40 billion0.57-$40 billion-$20 billionTOTAL EXPENDITURE (Billions of dollars)TOTAL EXPENDITURE (Billions of dollars) ?MPC=0.5MPC=0.7520045-Degree Line45-Degree Line200180180New AE LineNew AE Line160160140140120New EquilibriumNew Equilibrium12010010080806060AE Line4040AE Line202060REAL GDP (Billions of dollars)20408010012014016018020020406080100 120 140 180 180200REAL GDP (Billions of dollars)TOTAL EXPENDITURE (Billions of dollars)TOTAL EXPENDITURE (Billions of dollars)

Question

Right click on image and click on open image in new tab to see the full and clear image. Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real GDP and total expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxes that change with income. The grey lines show the 45-degree line on each graph.The first economy's MPC is 0.5. Therefore, its initial total expenditure line has a slope of 0.5 and passes through the point (100, 100).The second economy's MPC is 0.75. Therefore, its initial total expenditure line has a slope of 0.75 and passes through the point (100, 100).Now, suppose there is a decrease of $20 billion in investment in each economy.Place a green line (triangle symbol) on each of the previous graphs to indicate the new total expenditure line for each economy. Then place a black point (plus symbol) on each graph showing the new level of equilibrium output. (Hint: You can see the slope and vertical axis intercept of a line on the graph by selecting it.) Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibriumwith real GDP and total expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxesthat change with income. The grey lines show the 45-degree line on each graph.The first economy's MPC is 0.5. Therefore, its initial total expenditure line has a slope of 0.5 and passes through the point (100, 100).The second economy's MPC is 0.75. Therefore, its initial total expenditure line has a slope of 0.75 and passes through the point (100, 100).Now, suppose there is a decrease of $20 billion in investment in each economy.Place a green line (triangle symbol) on each of the previous graphs to indicate the new total expenditure line for each economy. Then place a black point(plus symbol) on each graph showing the new level of equilibrium output. (Hint: You can see the slope and vertical axis intercept of a line on the graphby selecting it.)(?(?)МРC-0.5МРC-0.7520045-Degree Line45-Degree Line200180180New AE LineNew AE Line160160E 140140120New EquilibriumNew Equilibrium1201001008060AE Line40AE Line202020406080100120140 18018020020406080100120140180180200REAL GDP (Billions of dollars)REAL GDP (Billions of dollars)In the first economy (with MPC = 0.5), the $20 billion decrease in investment causes equilibrium output to decrease by $billion. In thesecond economy (with MPC = 0.75), the $20 billion decrease in investment causes equilibrium output to decrease by $billion. Therefore,a lower MPC is associated with amultiplier.(higher or lower?)Now, confirm your graphical analysis algebraically using the oversimplified multiplier formula:Multiplier =1-MBGFor the first economy, with an MPC of 0.5, the effect of the $20 billion decrease in investment is as follows:multiplier options:Change in Equilibrium Output = Change in Total Expenditure x Multiplier1 x (1– 0.5)Using the same method, the multiplier for the second economy is1x (1– 0.75)0.75change in total expenditureoptions:24+$20 billion0.25+$40 billion0.57-$40 billion-$20 billionTOTAL EXPENDITURE (Billions of dollars)TOTAL EXPENDITURE (Billions of dollars) ?MPC=0.5MPC=0.7520045-Degree Line45-Degree Line200180180New AE LineNew AE Line160160140140120New EquilibriumNew Equilibrium12010010080806060AE Line4040AE Line202060REAL GDP (Billions of dollars)20408010012014016018020020406080100 120 140 180 180200REAL GDP (Billions of dollars)TOTAL EXPENDITURE (Billions of dollars)TOTAL EXPENDITURE (Billions of dollars)

Accepted Answer

An investment increases by $20billion, new AE line will shift upward parallely by $20billion.