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 $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 116 114 112 110 108 106 104 102 100 100 AD. 1 105 115 120 125 130 OUTPUT (Billions of dollars) 110 135 140 AD 2 AD 3 ? The following graph plots equilibrium in the money market at an interest rate of 7.5% 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.
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 $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 116 114 112 110 108 106 104 102 100 100 AD. 1 105 115 120 125 130 OUTPUT (Billions of dollars) 110 135 140 AD 2 AD 3 ? The following graph plots equilibrium in the money market at an interest rate of 7.5% 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.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Blank 1: rise/fall
Blank 2: 1.25 billion, 2.5 billion, 0.62 billion
Blank 3: decrease/increase
Blank 4: 1 billion, 2.5 billion, 1.2 billion
Blank 5: automatic stabilizer, liquidity preference, crowding-out, multiplier
Please fill in the blanks and adjust the graphs
Transcribed Image Text: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 $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
100
AD 1
105
110
115
120
125
OUTPUT (Billions of dollars)
130
135
140
AD 2
AD 3
The following graph plots equilibrium in the money market at an interest rate of 7.5% 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.
(?)
Transcribed Image Text: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
to
15.0
12.5
10.0
to
7.5
5.0
2.5
0
0
15
Money Supply
Money Demand
30
45
60
MONEY (Billions of dollars)
by
investment spending is known as the
75
90
Money Demand
Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $0.5 billion. Based on the
changes made to the money market in the previous scenario, the new interest rate causes the level of investment spending
by
Money Supply
?
Taking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded
at every price level. The impact of an increase in government purchases on the interest rate and the level of
▼ 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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