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The multiplier and the MPC
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 aggregate expenditure equal to $ 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 degree line on each graph.
The first economy's MPC is Therefore, its initial aggregate expenditure line has a slope of and passes through the point
The second economy's MPC is Therefore, its initial aggregate expenditure line has a slope of and passes through the point
Now, suppose there is a decrease of $ billion in investment in each economy.
Place a green line triangle symbol on each of the previous graphs to indicate the new aggregate 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 araph by selectina it
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