MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
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Question
Chapter 10, Problem 4TY
To determine
To explain:The curve giving rise to more inflation- the steep
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Explain in words and with graph, why rising prices reduce the multiplier effect of an autonomous increase in aggregate demand.
Using a diagram, show and explain why rising prices reduce the multiplier effect of an increase in 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 (AD1AD1).
Suppose the government increases its purchases by $3 billion.
Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD2AD2) after the multiplier effect takes place.
Hint: Be sure the new aggregate demand curve (AD2AD2) is parallel to AD1AD1. You can see the slope of AD1AD1 by selecting it on the following graph.
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- Name some factors that could cause the SRAS curve to shift, and say whether they would shift SRAS to the right or to the left.arrow_forwardConsider 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 (AD1AD1). Suppose the government increases its purchases by $3 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD2AD2) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (AD2AD2) is parallel to AD1AD1. You can see the slope of AD1AD1 by selecting it on the following graph. 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/Rise by 2 ,1, or 0.5 Billion. After the multiplier effect is accounted for, the change in investment spending…arrow_forward
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