Consider a hypothetical economy in which households spend $0.50 of each additionaldollar they earn and save the remaining $0.50. The following graph shows the economy'sinitial aggregate demand curve (AD₂).Suppose the government increases its purchases by $5 billion.Use the green line (triangle symbol) on the following graph to show the aggregatedemand curve (AD) after the multiplier effect takes place.Hint: Be sure the new aggregate demand curve (AD) is parallel to AD. You can see theslope of AD, by selecting it on the following graph.118114112110108106104102100H100 105 110 115 120 125 130 135 140OUTPUT (Bloof dollar)15.0The following graph shows the money market in equilibrium at an interest rate of 7.5%and a quantity of money equal to $45 billion.10.0401Show the impact of the increase in government purchases on the interest rate by shiftingone or both of the curves on the following graph.7.525015Money SupplyMorey Demand304560MONEY (Billens of dollar)AD₂75AD₂90Money DemandMoney Supply?Suppose that for each one-percentage-point increase in the interest rate, the level ofinvestment spending declines by $0.5 billion. The change in the interest rate (accordingto the change you made to the money market in the previous scenario) therefore cau sessionthe level of investment spending toby_After the multiplier effect is accounted for, the change in investment spending will causethe quantity of output demanded tobyat each price level. The impactof an increase in government purchases on the interest rate and the level of investmentspending is known as theeffect.Use the purple line (diamond symbol) on the graph at the beginning of this problem toshow the aggregate demand curve (AD) after accounting for the impact of the increase ingovernment purchases on the interest rate and the level of investment spending.Hint: Be sure your final aggregate demand curve (AD,) is parallel to AD, and AD₂. You cansee the slopes of AD, and AD, by selecting them on the graph.

Given Marginal propensity to consume = 0.50Marginal propensity to save = 0.50Increase in government…

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 (AD,). 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 (AD) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (AD) is parallel to AD,. You can see the slope of AD, by selecting it on the following graph. PRICE LEVEL 116 114 112 110 108 106 104 102 8 100 MP, 100 106 110 115 120 DUTPUT (Btion of 130

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 (AD,). 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 (AD) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (AD) is parallel to AD,. You can see the slope of AD, by selecting it on the following graph. PRICE LEVEL 116 114 112 110 108 106 104 102 8 100 MP, 100 106 110 115 120 DUTPUT (Btion of 130

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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