### Understanding Aggregate Demand in a Hypothetical Economy**Concept Overview:**Consider a hypothetical economy where households spend $0.75 of each additional dollar they earn and save the remaining $0.25. The initial aggregate demand curve (AD₁) for this economy is depicted in the following graph.**Government Purchase Impact:**Suppose the government increases its purchases by $3.75 billion. **Exercise:**Using the green line (triangle symbol) on the provided graph, indicate the new aggregate demand curve (AD₂) after the multiplier effect takes place.**Hint:** Ensure the new aggregate demand curve (AD₂) is parallel to AD₁. You can determine the slope of AD₁ by examining the following graph.### Graph ExplanationThe graph provided shows the initial aggregate demand curve (AD₁) for a hypothetical economy:- **Y-Axis (Vertical):** Represents the price level, ranging from 100 to 116.- **X-Axis (Horizontal):** Represents the Real GDP or Output, ranging from 100 to 140.The initial aggregate demand curve (AD₁) starts at a price level of approximately 112 and a GDP value of 110, and ends at a price level of 100 and a GDP value of 130, illustrating a downward-sloping demand curve.On the right side of the graph, there are symbols for different demand curves:- A green triangle represents AD₂.- A purple diamond represents AD₃.**Instructions for Students:**Use the green line (triangle symbol) to draw the second aggregate demand curve (AD₂) parallel to the initial aggregate demand curve (AD₁). Please ensure the new curve correctly reflects the effect of the government's increased purchases, maintaining the same slope as AD₁.Understanding the changes in aggregate demand due to external factors like government spending will help in analyzing real-world economic scenarios more effectively.

In macroeconomics, a multiplier is a component of proportionality that actions how much an…

symbol) on the following graph to show the aggregate demand curve (AD₂) after the multiplier effect takes place. egate demand curve (AD₂) is parallel to AD₁. You can see the slope of AD₁ by selecting it on the following graph. ? 14 AD₂ 115 120 125 130 135 140 } AD 3

symbol) on the following graph to show the aggregate demand curve (AD₂) after the multiplier effect takes place. egate demand curve (AD₂) is parallel to AD₁. You can see the slope of AD₁ by selecting it on the following graph. ? 14 AD₂ 115 120 125 130 135 140 } AD 3

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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1. How is the aggregate demand curve different from the demand curve for a single good, like hamburgers?
2. Briefly explain why the following would cause the Aggregate Demand curve to shift to the right(an increase), or to the left(a decrease):an increase in interest rates
QUESTION 1 Aggregate Demand (AD) Is drawn with price level, average price for everything in the economy relative to the base year price, (not the dollar price) on the vertical axis and Real GDP demanded on the horizontal axis. Use the numbers from the following table and calculate the Real GDP Demanded using expenditure approach of GDP, and plot all the points on the Aggregate Demand. Connect all the points to draw the aggregate demand. [Review Chapter 5 powerpoints, textbook and Internet source to find what numbers have tolbe added to get each of the points In the Aggregate Demand curve.] (国 Real GDP Demanded (AD): C+l+G+ (X-M) Real GDP Supplied: Ageregate Supply (AS) $680 Price Level 110 $400 $185 $150 $55 $50 115 390 180 150 50 50 720 120 380 175 150 45 50 750 125 370 170 150 40 50 780 130 360 165 150 35 50 810 8.
Question 3 of 16 Income and consumption changes for five people are shown in the table. Given this information, rank the marginal propensities to consume (MPC) for the five people from largest to smallest. Largest MPC Smallest MPC Answer Bank Bert Doug Eli Carter Al Name Income change Consumption change Al +$5,000+$5,000 +$3,000+$3,000 Bert +$2,500+$2,500 +$800+$800 Carter +$1,000+$1,000 +$800+$800 Doug −$2,500−$2,500 −$1,750−$1,750 Eli −$5,000−$5,000 −$2,000−$2,000
which makes sense to bubble in?
Is the relationship between changes in spending and changes in real GDP in the multiplier effect a direction (positive) relationship or is it an inverse (negative) relation- ship?
6) Suppose the economy is closed and is characterized by the following behavioral equations: C=C₁+C₁YD Y₁ = Y-T I=b₁ + b₂Y a. Government spending and taxes are constant. Solve for the equilibrium output. What is the value of the multiplier? How does the relationship between investment and output affect the value of the multiplier as compared to the case when investment was exogenous? For the multiplier to be positive what condition must (c₁ +b₁ ) satisfy? Explain your answers? b. Suppose that the parameter bo, sometimes called business confidence, increases. How will the equilibrium output be affected? Will investment change by more or less than the change in bo? Why? What will happen to national saving?
4. What do we mean when we talk about the export base of a region? How does an increase in the export base affect total employment? How does this relate to the multiplier? What factors limit the size of the multiplier within cities?
Question 41 The following equations describe the economy: C= 150 + 0.9Yd | = 150 G = 250 X 200 IM = 0.06Y T= 0.1Y At the equilibrium level of GDP, net exports are equal to a).-180 O b) - -20 Oc) 200 O d) 20 Next Page Previous Page Question 40 The following equations describe the economy: C = 150 + 0.9Y | = 150 G = 250 X 200 IM = 0.06Y T= 0.1Y In equilibrium GDP is equal to a) 3,000 b) 750 Oc) 3,750 O d) 7,500