5. Fiscal policy, the money market, and aggregate demandSuppose there is some hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the $0.50 they have leftover. The following graph plots the economy's initial aggregate demand curve (AD)).Suppose now that the government increases its purchases by $2.5 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 AD. You can see the slope of AD, by selecting it on the following graph.?PRICE LEVEL116114112110108106104102100100AD₁102106 108 110OUTPUT (Billions of dollars)104112114116AD₂AD₂ oter 20 HomeworkINTEREST RATE3.02.52.01.51.00.505Money Supplyknown as theMoney Demand101520MONEY (Billions of dollars)2530Money DemandMoney SupplySuppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $1 billion. Based on thechanges made to the money market in the previous scenario, the new interest rate causes the level of investment spending to ▼byrisefallbyTaking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded toat every price level. The impact of an increase in government purchases on the interest rate and the level of investment spending iseffect.Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (AD) after accounting forthe impact of the increase in government purchases on the interest rate and the level of investment spending.Hint: Be sure your final aggregate demand curve (AD) is parallel to AD, and AD. You can see the slopes of AD, and AD by selecting them on the

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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 (AD)). Suppose now that the government increases its purchases by $2.5 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 AD. You can see the slope of AD, by selecting it on the following graph. ? PRICE LEVEL 116 114 112 110 108 100 104 102 100 100 AD₁ 102 104 106 108 110 OUTPUT (Billions of dollars) 112 114 116 AD₂ AD₂

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 (AD)). Suppose now that the government increases its purchases by $2.5 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 AD. You can see the slope of AD, by selecting it on the following graph. ? PRICE LEVEL 116 114 112 110 108 100 104 102 100 100 AD₁ 102 104 106 108 110 OUTPUT (Billions of dollars) 112 114 116 AD₂ AD₂

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter11: Fiscal Policy

Section: Chapter Questions

Problem 1.8P

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Similar questions

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