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 known as the effect.

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Chapter1: Making Economics Decisions
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The SECOND graph (displaying Money Supply and Money Demand)  attached shows the money market in equilibrium at an interest rate of 6% and a quantity of money equal to $15 billion. 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.
 
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(?
12
Money Supply
10
Money Demand
8
Money Supply
---
Money Demand
2
10
15
20
25
30
MONEY (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 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
known as the
effect.
INTEREST RATE
LO
Transcribed Image Text:(? 12 Money Supply 10 Money Demand 8 Money Supply --- Money Demand 2 10 15 20 25 30 MONEY (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 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 known as the effect. INTEREST RATE LO
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.
116
114
AD,
112
AD
1
110
AD,
3.
108
106
104
102
100
100
102
104
106
108
110
112
114
116
OUTPUT (Billions of dollars)
PRICE LEVEL
Transcribed Image Text: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. 116 114 AD, 112 AD 1 110 AD, 3. 108 106 104 102 100 100 102 104 106 108 110 112 114 116 OUTPUT (Billions of dollars) PRICE LEVEL
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