The following graph plots equilibrium in the money market at an interest rate of 1.5% and a quantity of money equal to $45 billion. 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 3.0 2.5 2.0 1.0 0.5 0 15 Money Supply 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 $1 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 known as the 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.
The following graph plots equilibrium in the money market at an interest rate of 1.5% and a quantity of money equal to $45 billion. 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 3.0 2.5 2.0 1.0 0.5 0 15 Money Supply 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 $1 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 known as the 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.
Chapter11: Fiscal Policy
Section: Chapter Questions
Problem 1.8P
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Transcribed Image Text:The following graph plots equilibrium in the money market at an interest rate of 1.5% and a
quantity of money equal to $45 billion.
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
3.0
2.5
2.0
1.0
0.5
0
0
15
Money Supply
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 $1 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 known as the
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: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 $3.5 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
AD₁
102
104 106 108 110
OUTPUT (Billions of dollars)
112
114
116
| |
AD ₂
AD 3
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