6 2. Fiscal policy, the money market, and aggregate demandConsider a hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The followinggraph shows the economy's initial aggregate-demand curve (AD₁ ).Suppose the government increases its purchases by $2 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 LEVEL116114112110108106104102100100AD₁102104 106 108 110 112OUTPUT (Billions of dollars)114116þ }AD2AD 3The following graph shows the money market in equilibrium 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. 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.(?)NTEREST RATE3.0to2.52.01.51.00.50015Money SupplybyMoney Demand304560MONEY (Billions of dollars)75investment spending is known as the90Suppose that for each one-percentage-point increase in the interest rate, the level of investment spending declines by $1 billion. The change in theinterest rate (according to the change you made to the money market in the previous scenario) therefore causes the level of investment spendingbyMoney DemandMoney SupplyAfter the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demandedtoat each price level. The impact of an increase in government purchases on the interest rate and the level ofeffect.Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate-demand curve (AD3) after accounting forthe 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 onthe graph.

Aggregate demand is the sum of consumption expenditure, investment expenditure, government…

graph shows the economy's initial aggregate-demand curve (AD₁). Suppose the government increases its purchases by $2 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 102 104 106 108 110 112 OUTPUT (Billions of dollars) 114 116 AD ₂ AD 3 The following graph shows the money market in equilibrium 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.

graph shows the economy's initial aggregate-demand curve (AD₁). Suppose the government increases its purchases by $2 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 102 104 106 108 110 112 OUTPUT (Billions of dollars) 114 116 AD ₂ AD 3 The following graph shows the money market in equilibrium 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.

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter11: Managing Aggregate Demand: Fiscal Policy

Section11.A: Graphical Treatment Of Taxes And Fiscal Policy

Problem 3TY

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22. Suppose economists observe that an increase in government spending of $10 billion raises the total demand for goods and services by $50 billion. What is the multiplier effect in this case?
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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. of Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (ADs) is parallel to ADj. You can see the slope of 4D, by selecting it on the following graph. Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $2 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_____ Y by______ Taking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded…
The following table shows the real output demanded and supplied at various price levels in a hypothetical economy. Real Output Demanded (Billions of dollars) 20 40 60 100 160 Price Level (Index number) 160 120 80 40 20 Real Output Supplied (Billions of dollars) (Billions of dollars) 170 160 140 100 Note: Line segments will automatically connect the points. 40 On the following graph, use the blue points (circle symbols) to plot the aggregate demand (Initial AD) curve for the economy. Then use the orange points (square symbols) to plot the short-run aggregate supply (SRAS) curve for the economy.
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