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7. Fiscal policy, the money market, and aggregate demand Suppose there is some hypothetical economy in which households spend 10.50 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 $2.5 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (ADS) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (AD₂) is parallel to AD,. You can see the slope of AD, by selecting it on the following graph. PRICE LEVEL 8 100 104 9 100 NP. 100 100 110 112 THE 116 OUTPUT (ons of dollars) 104

7. Fiscal policy, the money market, and aggregate demand Suppose there is some hypothetical economy in which households spend 10.50 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 $2.5 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (ADS) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (AD₂) is parallel to AD,. You can see the slope of AD, by selecting it on the following graph. PRICE LEVEL 8 100 104 9 100 NP. 100 100 110 112 THE 116 OUTPUT (ons of dollars) 104

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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The following graph plots equilibrium in the money market at an interest rate of 3% and a quantity of money equal to $15 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 Money Supply More Demand known as the 10 16 MONEY (one of dollars) 29 Money Demand 181 Money Supply Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $0.5 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 27 by at every price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is effect.
Transcribed Image Text:The following graph plots equilibrium in the money market at an interest rate of 3% and a quantity of money equal to $15 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 Money Supply More Demand known as the 10 16 MONEY (one of dollars) 29 Money Demand 181 Money Supply Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $0.5 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 27 by at every price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is effect.
7. 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 (AD)). Suppose now that the government increases its purchases by $2.5 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (ADS) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (AD₂) is parallel to AD,. You can see the slope of AD, by selecting it on the following graph. 112 PRICE LEVEL 8 100 104 9 100 NP. 100 110 112 THE OUTPUT (ons of dollars) 104 110
Transcribed Image Text:7. 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 (AD)). Suppose now that the government increases its purchases by $2.5 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (ADS) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (AD₂) is parallel to AD,. You can see the slope of AD, by selecting it on the following graph. 112 PRICE LEVEL 8 100 104 9 100 NP. 100 110 112 THE OUTPUT (ons of dollars) 104 110
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