PRICE LEVEL 5. Fiscal policy, the money market, and aggregate demand Suppose there is some hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the $0.50 they have left over. The following graph plots the economy's initial aggregate demand curve (AD1). Suppose now that the government increases its purchases by $5 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (AD) is parallel to AD₁. You can see the slope of AD₁ by selecting it on the following graph. ? 116 A 114 112 110 108 106 104 20 102 AD₁ 100 80 100 105 110 115 120 125 OUTPUT (Billions of dollars) 130 30 A 135 140 AD₂ AD 3 The following graph plots equilibrium in the money market at an interest rate of 7.5% and a quantity of money equal to $45 billion.

The graph models an economy in equilibrium with a real GDP of $180 billion. Suppose that consumers' expectations about future incomes change, causing unplanned inventory investment to increase by $30 billion. Shift the planned aggregate expenditure (AE) line to show the effect of this change.   *Image*   1) This change will cause the equilibrium level of real GDP to      a) decrease.      b) remain unchanged.      c) increase.   2) By how much will GDP change once the new equilibrium is reached? If GDP will decrease, be sure to include a negative sign. GDP change:   $ ________ billion

The following graph shows several aggregate demand and aggregate supply curves for an economy whose potential output is $5 trillion. The curves are labelled a, b, c, and d. Three points on the graph are also indicated by grey stars and labelled K, L, and M. 100 90 80 M. 70 60 50 b 40 30 a 20 2 3 4 5 6 7 REAL GDP (Trillions of dollars) Identify which curve on the previous graph corresponds to each description in the following table. If the curve described does not appear on the graph choose Not Shown. Description b Not Shown a Long-run aggregate supply (LRAS) Short-run aggregate supply (SRAS) when the economy is at long-run equilibrium Short-run aggregate supply (SRAS) when there is an inflationary gap Short-run aggregate supply (SRAS) when there is a recessionary gap Aggregate demand (AD) PRICE LE VEL

Assume the Potential GDP is $15 trillion dollars. Use the table below to answer the following questions. Assume all values represent trillions of dollars.                  Use the table to create two graphs: 1. aggregate expenditure model and 2. an aggregate supply aggregate demand model. Note that the equilibrium in the table above will determine your real GDP and your potential GDP should be plotted in both graphs.  What type of macroeconomic equilibrium does this economy reflect?  Note that the multiplier is 2 because this economy has imports. If Investment expenditures increase by $2.5, how much does GDP increase?  Does the increase in investment expenditures from part C result in a full  employment equilibrium? Why?  Graphically show the effects from part C in our Aggregate Expenditure  Model and Aggregate Supply-Aggregate Demand Model.

The following graph shows the aggregate demand (AD) and aggregate supply (AS) curves for the United States in 1941.   Shift one of the curves on the following graph to illustrate the effect of increased U.S. government spending during World War II.

Suppose an economy is operating at point A on the graph showing aggregate demand. A decrease in the aggregate price level causes the economy to move to point B On the graph showing aggregate expenditures (AE), show the change caused by the movement from point A to point B on the aggregate demand curve. Aggregate price level Aggregate demand Aggregate output Aggregate expenditures Income (Y) Y-AE AE

Suppose there is some hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the $0.50 they have left over. The following graph plots the economy's initial aggregate demand curve (AD1). Suppose now that the government increases its purchases by $3.5 billion. of Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (ADs) is parallel to ADj. You can see the slope of 4D, by selecting it on the following graph. Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $2 billion. Based on the changes made to the money market in the previous scenario, the new interest rate causes the level of investment spending to_____ Y by______ Taking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded…

Describe the volatility of government spending and net exports relative to that of GDP and suggest an explanation for the patterns you observe in the graph.

Consider an economy in which investment is $200, government purchases are $500, net exports are $30, and the price level is fixed. Taxes vary with income, and as a result, the consumption schedule looks like that shown in the following table.  Fill in the missing values. Graph the aggregate expenditure graph using the above data.  This is the graph with Aggregate Expenditures on the Y axis and Real GDP on the x axis.  Start with a forty five degree line. Suppose that full employment comes at GDP=$1,480. Is the economy in an inflationary or recessionary gap? What action would you take to close the gap?

Consider an economy in which investment is $200, government purchases are $500, net exports are $30, and the price level is fixed. Taxes vary with income, and as a result, the consumption schedule looks like that shown in the following table.  Fill in the missing values. Graph the aggregate expenditure graph using the above data.  This is the graph with Aggregate Expenditures on the Y axis and Real GDP on the x axis.  Start with a forty five degree line. Suppose that full employment comes at GDP=$1,480. Is the economy in an inflationary or recessionary gap? What action would you take to close the gap? I am looking for the amount you would cut/increase taxes or decrease/increase government spending.