Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $0.5 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 by Taking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded to by at every price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is effect. known as the Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (AD) after accounting for the 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 graph

Consider a hypothetical economy where there are no taxes and no foreign trade, and households spend $0.90 of each additional dollar they earn and ; the marginal propensity to save (MPS) for this save the remaining $0.10. The marginal propensity to consume (MPC) for this economy is economy is ; and the multiplier for this economy is Suppose investment spending in this economy decreases by $150 billion. The decrease in investment will lead to a decrease in income, generating a decrease in consumption that decreases income yet again, and so on. Fill in the following table to show the impact of the change in investment spending on the first two rounds of consumption spending and, eventually, on total output and income. Hint: Be sure to enter a negative sign in front of the number if there is a decrease in consumption. Change in Investment Spending = -$150 billion First Change in Consumption = $ Second Change in Consumption $ Total Change in Output = $ billion billion billion In reality,…

5. Graphing the saving and consumption functions from MPC Consider a hypothetical economy in which the marginal propensity to consume (MPC) is 0.5. That is, if disposable income increases by $1, consumption increases by 50¢. Suppose further that last year, disposable income in the economy was $300 billion and consumption was $250 billion. Based on these data, use the blue line (circle symbols) to plot this economy's consumption function on the following graph. REAL CONSUMER SPENDING (Billions of dollars) 700 600 500 400 300 200 100 0 Aa Aa -100 Consumption Fn. O O 0 100 200 300 400 500 600 700 800 REAL DISPOSABLE INCOME (Billions of dollars) Help Clear All Suppose that this year, disposable income is projected to be $340 billion. Based on your analysis, you would expect consumption to be and saving to be

The levels of real disposable income and aggregate expenditures for an economy are given in the following table. -- Use the blue points (circle symbol) to plot the expenditures line for this economy on the following graph. Line segments will automatically connect the points. The black line represents the 45-degree line, where aggregate expenditures equal real GDP. Use the black point (plus symbol) to indicate equilibrium real GDP. - - In the previous graph, if the economy produces at an output level that is higher than equilibrium GDP, then the economy is in because aggregate expenditures are real GDP, and unplanned inventory investment is Read GDP (Y) Aggregate Expenditures (AE) (Trillions of dollars per year) (Trillions of dollars per year) 0 1 1 1.75 2 2.5 3 3.25 4 4 5 4.75 6 5.5 7 6.25 8 7 Use the blue points (circle symbol) to plot the expenditures line for this economy on the following graph. Line segments will automatically connect the points. The black line represents the…