5. Fiscal policy, the money market, and aggregate demandSuppose there is some hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the $0.50 they have leftover. The following graph plots the economy's initial aggregate demand curve (AD₁).Suppose now that the government increases its purchases by $3.5 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.PRICE LEVEL116114112110108106104102100AD₁100102104 106 108 110OUTPUT (Billions of dollars)112114 116AD₂$3AD₂ The following graph plots equilibrium in the money market at an interest rate of 1.5% and a quantity of money equal to $45 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.?INTEREST RATE3.02.52.01.51.00.50015Money Supplyknown as theMoney Demand304560MONEY (Billions of dollars)7590Money DemandMoney SupplySuppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $1 billion. Based on thechanges made to the money market in the previous scenario, the new interest rate causes the level of investment spending to byTaking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded tobyat every price level. The impact of an increase in government purchases on the interest rate and the level of investment spending iseffect.Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (AD3) 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 (AD3) is parallel to AD₁ and AD₂. You can see the slopes of AD₁ and AD₂ by selecting them on

Marginal Propensity to Consume (MPC) measures the proportion of an increase in income that gets…

Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $1 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 by Taking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded to at every 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

Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $1 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 by Taking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded to at every 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

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Chapter1: Making Economics Decisions

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Question

5. Fiscal policy, the money market, and aggregate demand
Suppose there is some hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the $0.50 they have left
over. The following graph plots the economy's initial aggregate demand curve (AD₁).
Suppose now that the government increases its purchases by $3.5 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.
PRICE LEVEL
116
114
112
110
108
106
104
102
100
AD₁
100
102
104 106 108 110
OUTPUT (Billions of dollars)
112
114 116
AD₂
$3
AD₂

The following graph plots equilibrium in the money market at an interest rate of 1.5% and a quantity of money equal to $45 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.
?
INTEREST RATE
3.0
2.5
2.0
1.5
1.0
0.5
0
0
15
Money Supply
known as the
Money Demand
30
45
60
MONEY (Billions of dollars)
75
90
Money Demand
Money Supply
Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $1 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
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 (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

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Step 1: Introduce the concept of Marginal Propensity to Consume (MPC) and Save (MPS).

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Step 2: Plot the change in aggregate demand.

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Step 3: Plot changes in money demand and fill in the blanks.

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Step 4: Plot Aggregate Demand (AD₃) and fill in the blanks.

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Use the figure to calculate the marginal propensity to consume (MPC) between point A and point B. MPC = (Enter your response as a real number rounded to two decimal places.) C Real consumption spending ($ billions) Consumption and National Income $3,750 $2,250 B $3,000 $5,000 Real national income or real GDP ($ billions) C
Below is some data for a hypothetical economy: C = -232 + 0.8Y XN = 107 - 0.1Y I = 100 T = 340 G = 340 Refer to the information above to answer this question. What is the value of the expenditure multiplier? a. 1.43 b. 4 c. 3.33 d. 2.43
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