INTEREST RATE O 25 20 1.5 1.0 0.5 0 0 15 Money Supply known as the Money Demand 30 45 MONEY (Billions of dollars) 75 00 Money Demand 101 Money Supply Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $2.5 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 image 2 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. Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (AD) 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 (AD)) is parallel to AD, and AD. You can see the slopes of AD, and AD by selecting them on the

INTEREST RATE O 25 20 1.5 1.0 0.5 0 0 15 Money Supply known as the Money Demand 30 45 MONEY (Billions of dollars) 75 00 Money Demand 101 Money Supply Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $2.5 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 image 2 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. Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (AD) 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 (AD)) is parallel to AD, and AD. You can see the slopes of AD, and AD by selecting them on the

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Chapter1: Making Economics Decisions

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Question

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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
10
25
20
1.0
05
O
15
Money Supply
known as the
Money Demand
30
45
60
MONEY (Billions of dollars)
75
00
o
Money Demand
101
Money Supply
Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $2.5 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
image 2
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.
Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (AD) 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 (AD) is parallel to AD, and AD. You can see the slopes of AD, and AD, by selecting them on the
graph.

Suppose there is some hypothetical economy in which households spend $0.75 of each additional dollar they earn and save the $0.25 they have left
Tover. The following graph plots the economy's initial aggregate demand curve (AD)).
Suppose now that 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 (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
104
106
104
102
100
AD,
100
105
110 115 120 125
OUTPUT (Bilions of dollars)
130
135 140
AD₂
AD₂,
image 1

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Step 1: Money demand, and money supply

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Step 2: Change in aggregate demand due to government spending increase

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Step 3: Change in money demand caused by increase in government spending.

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Step 4: Change in investment spending

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Step 5: Multiplier effect on aggregate demand

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