AftemptsDo No Harm /45. Fiscal policy, the money market, and aggregate demandConsider a hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The followinggraph shows the economy's initial aggregate demand curve (AD).Suppose the govermment increases its purchases by $3.5 billion.Use the green line (triangle symbal) 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.116114AD,112AD.AD,108106104102100100102104106106110112114116OUTPUT (BIlions of dolars)The following graph shows the money market in equilibrium at an interest rate of 6% and a quantity of money equal to $60 billion.Show the impact of the increase in government purchases on the interest rate by shifting ane ar both of the curves on the following graph.12Money Supply10Money DemandMoney SupplyMoriey Demand2040a0100120MONEY (BIlons 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 spendingto v byAfter the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demandedtov byv at each price level. The impact of an increase in government purchases on the interest rate and the level ofinvestment spending is known as thev effect.Use the purple line (diamond symbal) on the graph at the beginning of this problem to show the aggregate demand curve (AD) 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 (ADs) is paralel to AD, and AD2. You can see the slopes of AD, and AD, by selecting them on thePRICE LEVEL

Given; MPC= 0.5 Increase in government spending= 3.5 billion Multiplier=11-MPC =11-0.5…

S. Fiscal policy, the money market, and aggregate demand 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 $3.5 billion. . Use the green line (triangle symbal) on the following graph to show the aggregate demand curve (AD:) after the muitiplier 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 t the fallowing graph. 114 AD, 112 110 AD, 104 100 100 102 104 10 08 110 112 114 116 OUTPUT (Bilons of dolars) The following graph shows the money market in equilibrium at an interest rate of 6% and a quantity of money equal to $60 billion. Show the impact of the increase in government purchases on the interest rate by shifting ane or both of the curves on the following graph. 12 Money Bupply 10 Maney Demand Money Supply Money Demand 20 40 100 120 MONEY (Billons of dolars) Suppose that for each ane-percentage-point increase in the interest rate, the level of investment spending declines by $0.5 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 v by 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 symbal) 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 PRICE LEVEL