the following the average marginal propensity to consume (MPC) is c1 = .52. They then looked...

the following the average marginal propensity to consume (MPC) is c₁ = .52.

They then looked at how different groups had different marginal propensities to consume. In particular:

For Group 1 of Italians, their MPC is c₁ = .3
For Group 2 of Italians, their MPC is c₁ = .65

Now, take the following hypothetical situation about the Italian economy:

M = X = 0
G = 500, T_p=500
C = 1000 + c₁(Y-T_p)
I = 200

Round to two decimal places in answers below:

First let’s imagine all Italians have the average MPC of c₁ = .52
1. What is the equilibrium level income? 3000
2. If the gov’t increases spending by 200, what is the new equilibrium level of income? 3416.67
3. What is the multiplier on government spending? 2.08
4. If government spending stays at 500, and instead they lower personal taxes by 200, why is the new equilibrium level of income? 3216.67
5. What is the multiplier on the tax reduction?-1.08
6. Which multiplier is larger? multiplier on govt spending is larger
7. Why are they different? portion of increase govt spending is consumed resulting in lower taxes?

Now, let’s look at the effect of difference in MPC.
1. Fill out the following table (your answer for all Italians should come from question 1)

Effect of Difference in MPC

	Marginal propensity to consume	Multiplier on government spending
All Italians	.52	2.08
Group 1	.3	1.43
Group 2	.65	2.86

Discuss the differences in multipliers. In words (not math!), how does the MPC relate to the multiplier?
Group 1 and Group 2 are two mutually exclusive collections of people in the Italian economy that have different consumption habits (this could be based on geography, age, income level, education, et) Make an educated guess about who belongs to each group. Then explain your reasoning.

Need help with G and then B and C

Expert Solution

Rahul Sunny answered 10 months ago

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