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. 6 Money Supply A INTEREST RATE 0 0 5 Money Demand known as the 10 15 20 MONEY (Billions of dollars) 25 30 ? =1 Money Demand Money Supply 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 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 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. 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 AD, and AD2. You can see the slopes of AD₁ and AD2 by selecting them on the graph.
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. 6 Money Supply A INTEREST RATE 0 0 5 Money Demand known as the 10 15 20 MONEY (Billions of dollars) 25 30 ? =1 Money Demand Money Supply 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 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 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. 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 AD, and AD2. You can see the slopes of AD₁ and AD2 by selecting them on the graph.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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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
0
0
5
Money Supply
known as the
Money Demand
10
15
20
MONEY (Billions of dollars)
25
30
=
Money Demand
Money Supply
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 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
▼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.
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.
Transcribed Image Text:5. Fiscal policy, the money market, and aggregate demand
Consider a hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The following
graph shows the economy's initial aggregate demand curve (AD₁).
Suppose the government increases its purchases by $2.5 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
102
104 106 108 110
OUTPUT (Billions of dollars)
112
114
116
þ f
AD₂
AD 3
The following graph shows the money market in equilibrium at an interest rate of 3% and a quantity of money equal to $15 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.
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