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 $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 (AD2) is parallel to AD₁. You can see the slope of AD₁ by selecting it on the following graph. (?) 116 114 112 AD 110 108 106 104 102 100 100 102 104 106 108 110 112 114 116 OUTPUT (Billions of dollars) 4 4 AD₂ 4 AD3
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 $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 (AD2) is parallel to AD₁. You can see the slope of AD₁ by selecting it on the following graph. (?) 116 114 112 AD 110 108 106 104 102 100 100 102 104 106 108 110 112 114 116 OUTPUT (Billions of dollars) 4 4 AD₂ 4 AD3
Chapter1: Making Economics Decisions
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Transcribed Image Text: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 $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 (AD2) is parallel to AD₁. You can see the slope of AD₁ by selecting it on the following graph.
(?)
116
114
112
AD
110
108
106
104
102
100
100
102
104
106
108
110
112
114
116
OUTPUT (Billions of dollars)
4 4
AD₂
4
AD3
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