### Money Market Equilibrium and the Impact of Government PurchasesThe following graph illustrates the money market in equilibrium, where the interest rate is 7.5% and the quantity of money is $60 billion.#### Graph Explanation1. **Axes:** - **Y-axis:** Represents the interest rate, ranging from 0% to 15%. - **X-axis:** Represents the money in billions of dollars, ranging from 0 to 120 billion dollars.2. **Curves:** - **Money Demand Curve (Blue Line):** Downward sloping from left to right, representing the inverse relationship between interest rate and quantity of money demanded. - **Money Supply Curve (Orange Line):** Vertical, indicating the quantity of money supplied, which is independent of the interest rate.3. **Equilibrium Point:** - The intersection of the Money Supply and Money Demand curves at a point where the interest rate is 7.5% and the quantity of money is $60 billion.#### Instructions to Show Impact of Government PurchasesTo illustrate the impact of an increase in government purchases on the interest rate, you need to adjust one or both curves (Money Demand or Money Supply) in the graph:- **Increasing Money Supply:** Shift the Money Supply curve (orange line) to the right, indicating an increased amount of money in the economy due to increased government spending. - **Increasing Money Demand:** Shift the Money Demand curve (blue line) to the right, reflecting an increased demand for money as a result of higher government spending leading to higher income and thus higher money demand.Understanding these shifts will help you see how increased government purchases influence the overall money market, particularly through changes in interest rates. ---### Understanding Money Demand and Investment Spending#### Graph ExplanationThe graph presents the relationship between the quantity of money (in billions of dollars) and the interest rate. The horizontal axis represents the quantity of money in the economy, ranging from 0 to 120 billion dollars. The vertical axis represents the interest rate, ranging from 0% to 5%. There are two primary lines shown:1. **Money Demand Curve:** A downward-sloping line indicating that the demand for money decreases as the interest rate increases.2. **An unknown aggregate demand curve:** Initially shown but will be modified according to the changes discussed below.#### Text ExplanationSuppose 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 __[blank]__ by __[blank]__.After the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded to __[blank]__ by __[blank]__ 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 __[blank]__ effect.#### Instruction for Graph ModificationUse 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 AD₁ and AD₂. You can see the slopes of AD₁ and AD₂ by selecting them on the graph.---This explanation facilitates understanding of how changes in interest rates affect investment spending and, consequently, aggregate demand.

Money demand refers to the amount of money that individuals and businesses in an economy are willing…

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 th 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. known as the 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 AD₁ and AD2. You can see the slopes of AD₁ and AD2 by selecting them on the graph.

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 th 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. known as the 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 AD₁ and AD2. You can see the slopes of AD₁ and AD2 by selecting them on the graph.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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