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. 6 Money Supply A INTEREST RATE 0 0 5 Money Demand known as the 10 15 20 MONEY (Billions of dollars) 25 30 ? =1 Money Demand Money Supply 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 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 by at each 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 (AD3) 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 (AD3) is parallel to AD, and AD2. You can see the slopes of AD₁ and AD2 by selecting them on the graph.
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. 6 Money Supply A INTEREST RATE 0 0 5 Money Demand known as the 10 15 20 MONEY (Billions of dollars) 25 30 ? =1 Money Demand Money Supply 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 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 by at each 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 (AD3) 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 (AD3) is parallel to AD, and AD2. You can see the slopes of AD₁ and AD2 by selecting them on the graph.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Transcribed Image Text:### Impact of Increased Government Purchases on Interest Rates
#### Graph Analysis
The graph provided illustrates the money market, showing the relationship between the money supply, money demand, and the interest rate. The x-axis represents the quantity of money in billions of dollars, while the y-axis represents the interest rate. Two curves are apparent on the graph:
1. **Money Demand (Downward Sloping Line)**: This curve shows the quantity of money demanded at different interest rates.
2. **Money Supply (Vertical Line)**: This curve represents the fixed quantity of money supplied, regardless of the interest rate.
In this specific instance, the graph indicates the following points:
- The money demand curve slopes downward from the top left to the bottom right.
- The money supply curve is vertical at $15 billion.
#### Economic Scenario Explanation
Suppose for each one-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 adjustments made in the previous scenario) thereby causes the level of investment spending to decline by a calculated amount. After considering the multiplier effect, the change in investment spending will further cause the quantity of output demanded to decrease by a specific quantity at each price level. This effect is observed and named as follows:
- **Interest Rate Effect** - The reduction in investment spending due to rising interest rates.
- **Investment Spending Decline** - The measurable drop in investment spending as the interest rate changes.
### Instructions for Graph Adjustment
Use the purple line (marked with a diamond symbol) on the provided graph to demonstrate the aggregate demand curve (\( AD_3 \)) after accounting for the impact of the increase in government purchases on the interest rate and the level of investment spending.
#### Important Hint:
Ensure that the final aggregate demand curve (\( AD_3 \)) is parallel to both \( AD_1 \) and \( AD_2 \). Evaluate the slopes of \( AD_1 \) and \( AD_2 \) and replicate accordingly on the graph.
This understanding and analysis of the graph highlight how government spending influences economic variables like the interest rate and investment spending, providing a comprehensive picture for learners studying macroeconomic policies.
Transcribed Image Text:**5. 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 (AD₁).
Suppose 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 (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.
### Graph Explanation
- The graph has the title "PRICE LEVEL" on the y-axis and "OUTPUT (Billions of dollars)" on the x-axis.
- The initial aggregate demand curve is labeled as AD₁ and appears as a downward-sloping line from a price level of 114 to around a price level of 100, and an output level from 100 to approximately 112 billion dollars.
- The color code provided shows:
- Green triangle for AD₂
- Purple diamond for AD₃
Introduce the new aggregate demand curve (AD₂) by shifting the AD₁ curve to the right. AD₂ should be parallel to AD₁.
The following graph shows the money market in equilibrium at an interest rate of 3% and a quantity of money equal to $15 billion.
### Task
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.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 1 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education