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 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD₂) 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. (?) PRICE LEVEL 116 114 112 110 108 106 104 102 100 100 AD 1 102 106 108 110 OUTPUT (Billions of dollars) 104 112 114 116 AD 2 AD 3

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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Show the impact of the increase in government purchases on the interest rate by shifting one or both of the curves on the following graph.
?
INTEREST RATE
12
10
00
CO
st
2
0
0
15
Money Supply
known as the
Money Demand
30
45
60
MONEY (Billions of dollars)
75
90
Money Demand
Money Supply
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.
Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (AD3) 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 (AD3) is parallel to AD₁ and AD₂. You can see the slopes of AD₁ and AD2 by selecting them on
the graph.
Transcribed Image Text:Show the impact of the increase in government purchases on the interest rate by shifting one or both of the curves on the following graph. ? INTEREST RATE 12 10 00 CO st 2 0 0 15 Money Supply known as the Money Demand 30 45 60 MONEY (Billions of dollars) 75 90 Money Demand Money Supply 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. Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (AD3) 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 (AD3) is parallel to AD₁ and AD₂. You can see the slopes of AD₁ and AD2 by selecting them on the graph.
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 billion.
Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD₂) 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.
(?)
PRICE LEVEL
116
114
112
110
108
106
104
102
100
100
AD
1
102
104 106 108 110 112
OUTPUT (Billions of dollars)
114 116
AD2
AD 3
Transcribed Image Text: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 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD₂) 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. (?) PRICE LEVEL 116 114 112 110 108 106 104 102 100 100 AD 1 102 104 106 108 110 112 OUTPUT (Billions of dollars) 114 116 AD2 AD 3
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