Figure 1. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs.MSPAD₂AD3AD1MD₂MDYRefer to Figure 1. Suppose the multiplier is 3 and the government increases its purchases by $25 billion. Also, suppose the AD curve would shift from AD₁ to AD₂ if there were no crowding out; the AD curve actually shifts from AD₁ to AD3 withcrowding out. Finally, assume the horizontal distance between the curves AD₁ and AD3 is $30 billion. The extent of crowding out, for any particular level of the price level, isSelect one:a. $30 billion.b. $25 billion.c. $60 billion.Od. $45 billion.

Ans. ) Given the question, is related to the concept of multiplier. Crowding out effect is defined…

Answered: Figure 1. On the left-hand graph, MS…

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter9: Aggregate Demand

Section: Chapter Questions

Problem 6.13P

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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. of Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (ADs) is parallel to ADj. You can see the slope of 4D, by selecting it on the following graph. Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $2 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_____ Y by______ Taking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded…
2. Equilibrium The following table shows the real output demanded and supplied at various price levels in a hypothetical economy. Real Output Demanded Price Level Real Output Supplied (Billions of dollars) (Billions of dollars) (Index number) (Billions of dollars) 10 90 140 20 60 130 40 30 100 80 20 80 140 10 20 On the following graph, use the blue points (circle symbols) to plot the aggregate demand (Initial AD) curve for the economy. Then use the orange points (square symbols) to plot the short-run aggregate supply (SRAS) curve for the economy. Note: Line segments will automatically connect the points. 100 Initial AD 80 SRAS New AD CE LEVEL (Billions of dollars)
Suppose the Federal government raises taxes which would decrease consumption by $50 billion, that the spending multiplier was 5, the money supply was $500 billion, and the inflation rate was 5%. Using the formula with "Multiplier = change in equlibrium GDP/initial change in spending formula" to calculate the equilibrium U.S. GDP with the above information (Note: Please show the full calculation of the equilibrium U.S. GDP with formula and step by step)
AS1 110 A 100 AD2 AD1 900 960 1100 Real GDP FIGURE 23-5 Refer to Figure 23-5. Suppose that an increase in government purchases by 40 causes the AD curve to shift to the right, as shown. The simple multiplier is and the multiplier is 5; 1.5 4; 1.2 4; 1.5 O 4; 2.8 O 5; 1.2 Price Level
The following table shows the real output demanded and supplied at various price levels in a hypothetical economy. Real Output Demanded (Billions of dollars) 20 40 60 100 160 Price Level (Index number) 160 120 80 40 20 Real Output Supplied (Billions of dollars) (Billions of dollars) 170 160 140 100 Note: Line segments will automatically connect the points. 40 On the following graph, use the blue points (circle symbols) to plot the aggregate demand (Initial AD) curve for the economy. Then use the orange points (square symbols) to plot the short-run aggregate supply (SRAS) curve for the economy.
2. Equilibrium The following table shows the real output demanded and supplied at various price levels in a hypothetical economy. Real Output Demanded Price Level Real Output Supplied (Billions of dollars) (Billions of dollars) (Index number) (Billions of dollars) 50 80 400 75 60 350 125 40 275 175 30 175 350 20 50 On the following graph, use the blue points (circle symbols) to plot the aggregate demand (Initial AD) curve for the economy. Then use the orange points (square symbols) to plot the short-run aggregate supply (SRAS) curve for the economy. Note: Line segments will automatically connect the points. 100 Initial AD 80
PRICE LEVEL 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 $2 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. 116 114 112 110 AD₁ 108 106 104 12 102 100 100 102 104 106 108 110 112 114 116 38.3¢ AD 3 (?)
Explain in technical details why the Lagrange multiplier is currently used in analyzing the theory of the consumer
Given the following information about an economy, answer the questions below: • C = 55 +0.7YD • /0 = 300 • Go = 280 ● NT 0.2Y 1 Use the multiplier to solve for Y*, and draw an AE-Y graph. Draw a BB graph for the economy. After solving for BB, show where the country's equilibrium Y would land on this graph. 2 - 3 Suppose the economy encountered a recessionary gap. Provide one way the government could use fiscal policy to close this gap and demonstrate this change on both above graphs.
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 to by Taking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded to known as the 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 the graph.
4. The multiplier effect of a change in government purchases Suppose there is some hypothetical closed economy in which households spend $0.80 of each additional dollar they earn and save the remaining $0.20. The marginal propensity to consume (MPC) for this economy is and the spending multiplier for this economy is Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government spending will lead to an increase in income, creating an initial change in consumption equal to . This increases income yet again, leading to a second change in consumption equal to The total change in demand resulting from the initial change in government spending is The following graph shows the aggregate demand curve (ADI) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD₂) after the multiplier effect takes place. For simplicity, assume that there is no…
Explain in words and with graph, why rising prices reduce the multiplier effect of an autonomous increase in aggregate demand.

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