Question: Hello, please help me with this, I continue to get it incorrect. 6. The multiplier effect of a change in government purchases Consider a hypothetical

Hello, please help me with this, I continue to get it incorrect.

Hello, please help me with this, I continue to get it incorrect.

6. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. Choices for the drop arrow lines are as follows: The marginal propensity to consume (MPC) for this economy is , and the spending multiplier for this economy is Drop#1: 0.25, or 0.75, or 1, or 1.33, or 4 Drop#2: 0.25, or 0.75, or 1, or 1.33, or 4 Suppose the government in this economy decides to decrease government purchases by $250 billion. The decrease in government purchases will lead to a decrease in income, generating an initial change in consumption equal to . This decreases income yet again, Drop#3: -$1,000Billion, or -$187.5Billion, or -$500Billion, or -$93.8Billion, or -$62.5Billion causing a second change in consumption equal to . The total change in demand resulting from the initial change in Drop#4: -$1,000Billion, or -$93.8Billion, or -$62.5Billion, or -$140.6Billion, or -$500Billion government spending is Drop#5: -$0.5Trillion, or -$1.9Trillion, or -$1Trillion, or -$0.8Trillion The following graph shows the aggregate demand curve (AD, ) for this economy before the change in government spending. Drop#6: decreases, or increases Use the green line (triangle symbol) to plot the new aggregate demand curve (AD2) after the multiplier effect takes place. For simplicity, assume that there is no "crowding out." Hint: Be sure that the new aggregate demand curve (AD2) is parallel to the initial aggregate demand curve (AD,). You can see the slope of AD, by selecting it on the graph. 140 AD 135 AD2 130 12 120 PRICE LEVEL 110 10 100 2 3 5 7 OUTPUT (Trillions of dollars)

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