5. Fiscal policy, the money market, and aggregate demand Consider a hypothetical economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. The following graph shows the economy's initial aggregate demand curve (AD¡ ). Suppose the government increases its purchases by $3.75 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 ADI. You can see the slope of AD¡ by selecting it on the following graph. 116 114 AD, 2 112 AD 110 AD, 108 106 104 102 PRICE LEVEL
5. Fiscal policy, the money market, and aggregate demand Consider a hypothetical economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. The following graph shows the economy's initial aggregate demand curve (AD¡ ). Suppose the government increases its purchases by $3.75 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 ADI. You can see the slope of AD¡ by selecting it on the following graph. 116 114 AD, 2 112 AD 110 AD, 108 106 104 102 PRICE LEVEL
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
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![5. Fiscal policy, the money market, and aggregate demand
Consider a hypothetical economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. The following
graph shows the economy's initial aggregate demand curve (AD1).
Suppose the government increases its purchases by $3.75 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 agregate demand curve (AD,) is parallel to AD. You can see the slope of AD by selecting it on the following graph.
(?
116
114
AD,
112
AD
110
AD
108
106
104
102
100
100
105
110
115
120
125
130
135
140
OUTPUT (Billions of dollars)
The following graph shows the money market in equilibrium at an interest rate of 1.5% and
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.
3.0
Money Supply
PRICE LEVEL](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F095e7339-ae56-4f10-abfe-6ee1503767c2%2F305e607e-43d1-4769-9fe2-7bedb2db1098%2F8pqu3uo_processed.png&w=3840&q=75)
Transcribed Image Text:5. Fiscal policy, the money market, and aggregate demand
Consider a hypothetical economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. The following
graph shows the economy's initial aggregate demand curve (AD1).
Suppose the government increases its purchases by $3.75 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 agregate demand curve (AD,) is parallel to AD. You can see the slope of AD by selecting it on the following graph.
(?
116
114
AD,
112
AD
110
AD
108
106
104
102
100
100
105
110
115
120
125
130
135
140
OUTPUT (Billions of dollars)
The following graph shows the money market in equilibrium at an interest rate of 1.5% and
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.
3.0
Money Supply
PRICE LEVEL
![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.
3.0
Money Supply
2.5
Money Demand
2.0
Money Supply
1.0
Money Demand
0.5
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 $2.5 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
by
After the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded to
▼ by
v 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
v 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](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F095e7339-ae56-4f10-abfe-6ee1503767c2%2F305e607e-43d1-4769-9fe2-7bedb2db1098%2Fqqkcxsf_processed.png&w=3840&q=75)
Transcribed Image Text: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.
3.0
Money Supply
2.5
Money Demand
2.0
Money Supply
1.0
Money Demand
0.5
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 $2.5 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
by
After the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded to
▼ by
v 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
v 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
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