Consider a hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The following graph shows the economy's initial aggregate-demand curve (AD1).

Suppose the government increases its purchases by $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.

NOTE:

MAKE sure to adjust GRAPHS properly and plot the one that needs to have the new AGGRGATE demand curve plotted properly and MAKE SURE ITS EASY TO SEE AND READ PLEASE!!!!!!

NOTE: here are the blank question options

Suppose that for each one-percentage-point increase in the interest rate, the level of investment spending declines by $0.5 billion. The change in the interest rate (according to the change you made to the money market in the previous scenario) therefore causes the level of investment spending to ______ [FALL or RISE] by ______ [1.25 billion or 0.62 billion or 2.5 billion]

After the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded to ______ [increase or decrease] by _______ [1 billion or 2.5 billion or 1.2 billion] at each price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is known as the ______ [liquitity effect or multiplier or crowding out or automatic stabalizer] effect

NOTE:

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:2. Fiscal policy, the money market, and aggregate demand Consider a hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The following graph shows the economy's initial aggregate-demand curve (AD1). Suppose the government increases its purchases by $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 AD, by selecting it on the following graph. 116 114 AD2 112 AD, 110 AD3 108 106 104 102 100 100 105 110 115 120 125 130 135 140 OUTPUT (Billions of dollars) PRICE LEVEL
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. 15.0 Money Supply 12.5 Money Demand 10.0 Money Supply 7.5 5.0 Money Demand 2.5 15 30 45 60 75 90 MONEY (Billions of dollars) Suppose that for each one-percentage-point increase in the interest rate, the level of investment spending declines by $0.5 billion. The change in the interest rate (according to the change you made to the money market in the previous scenario) therefore causes the level of investment spending to fall v by After the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded to by at each 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. INTEREST RATE

Question

Consider a hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The following graph shows the economy's initial aggregate-demand curve (AD1).

Suppose the government increases its purchases by $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.

NOTE:

MAKE sure to adjust GRAPHS properly and plot the one that needs to have the new AGGRGATE demand curve plotted properly and MAKE SURE ITS EASY TO SEE AND READ PLEASE!!!!!!

NOTE: here are the blank question options

Suppose that for each one-percentage-point increase in the interest rate, the level of investment spending declines by $0.5 billion. The change in the interest rate (according to the change you made to the money market in the previous scenario) therefore causes the level of investment spending to ______ [FALL or RISE] by ______ [1.25 billion or 0.62 billion or 2.5 billion]

After the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded to ______ [increase or decrease] by _______ [1 billion or 2.5 billion or 1.2 billion] at each price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is known as the ______ [liquitity effect or multiplier or crowding out or automatic stabalizer] effect

NOTE:

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.

2. Fiscal policy, the money market, and aggregate demand
Consider a hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The following
graph shows the economy's initial aggregate-demand curve (AD1).
Suppose the government increases its purchases by $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 AD, by selecting it on the following graph.
116
114
AD2
112
AD,
110
AD3
108
106
104
102
100
100
105
110
115
120 125
130
135
140
OUTPUT (Billions of dollars)
PRICE LEVEL

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.
15.0
Money Supply
12.5
Money Demand
10.0
Money Supply
7.5
5.0
Money Demand
2.5
15
30
45
60
75
90
MONEY (Billions of dollars)
Suppose that for each one-percentage-point increase in the interest rate, the level of investment spending declines by $0.5 billion. The change in the
interest rate (according to the change you made to the money market in the previous scenario) therefore causes the level of investment spending to
fall v by
After the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded to
by
at each 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.
INTEREST RATE

Accepted Answer

Multiplier = 1/(1-MPC)= 1/(1-0.5)=2
Increase in Government purchases= $3.5 billion
Change in AD=…