Consider a hypothetical economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. The followinggraph 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 aggregate demand curve (AD2) is parallel to AD1. You can see the slope of AD1 by selecting it on the following graph.116114AD,112AD,110AD,108106104102100100105110115120125130135140OUTPUT (Billions of dollars)PRICE LEVEL 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.(?15.0Money Supply12.5Money Demand10.0Money Supply7.55.0Money Demand2.520406080100120MONEY (Billions of dollars)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 theinterest rate (according to the change you made to the money market in the previous scenario) therefore causes the level of investment spending tov byAfter the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded tobyv at each price level. The impact of an increase in government purchases on the interest rate and the level of investment spending isknown as theeffect.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 on thegraph.INTEREST RATE

Answer: Given, MPC (marginal propensity to consume) = 0.75 MPS (marginal propensity to save) = 0.25…

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 aggregate demand curve (AD2) is parallel to AD1. You can see the slope of AD1 by selecting it on the following graph. (? 116 114 AD2 112 AD, 110 AD, 108 106 104 102 100 100 105 110 115 120 125 130 135 140 OUTPUT (Billions of dollars) PRICE LEVEL

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 aggregate demand curve (AD2) is parallel to AD1. You can see the slope of AD1 by selecting it on the following graph. (? 116 114 AD2 112 AD, 110 AD, 108 106 104 102 100 100 105 110 115 120 125 130 135 140 OUTPUT (Billions of dollars) PRICE LEVEL

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Please answer everything in the photo including the graph.
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