5. Fiscal policy, the money market, and aggregate demandConsider a hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The followingraph shows the economy's initial aggregate demand curve (AD)).Suppose 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 AD; by selecting it on the following graph.PRICE LEVEL114112110106100104102100100102104 106 108 110112OUTPUT (Billions of dollars)114116AD₂AD₂ 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 RATE20252.05100.50by15Money Supplyknown as theMoney Demand304560MONEY (Billions of dollars)7590Money DemandSuppose that for each one-percentage-point increase in the interest rate, the level of investment spending declines by $1 billion. The change in theinterest rate (according to the change you made to the money market in the previous scenario) therefore causes the level of investment spending toMoney SupplyAfter the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded tobyat each price level. The impact of an increase in government purchases on the interest rate and the level of investment spending iseffect.

The marginal propensity to consume (MPC) measures the proportion of an increase in income that is…

Answered: Use the green line (triangle symbol) on…

Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD₂) after the multiplier effect takes place.

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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5. Fiscal pollcy, 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 $2.5 billion. / Tools 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 ADi 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 $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____ A-z T Tips Tips Taking the multiplier effect into account, the…
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 1.0 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 each one-percentage-point increase in the interest rate, the level of investment spending declines by $2.5 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…
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…
6. The multiplier effect Consider a hypothetical economy. Households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The multiplier for this economy is Suppose government purchases, G, in this economy increase by $250 billion. The increase in G will lead to an increase in income, generating an increase in consumption that increases income yet again, and so on. Fill in the following table to show the impact of the change in G on the first two rounds of consumption spending and, eventually, on national income. Note: Use negative signs if numbers are negative. Change in G = $250 billion First Change in Consumption = $ billion Second Change in Consumption 24 billion Total Change in Income = billion Now consider the impact of a similar change in taxes. The (absolute value) of the tax multiplier in this question will be ; thus, if taxes change by $250 billion, spending will change by $ billion. Based on your results, this Keynesian model predicts that a change…
22. Suppose economists observe that an increase in government spending of $10 billion raises the total demand for goods and services by $50 billion. What is the multiplier effect in this case?
116 114 AD2 112 AD1 110 AD3 108 106 104 102 100 100 102 104 106 108 110 112 114 116 OUTPUT (Billions of dollars) PRICE LEVEL
3. The spending multiplier effect Consider a hypothetical economy. Households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The spending multiplier for this economy is Suppose investment in this economy decreases by $200 billion. The decrease in investment will lead to a decrease in income, generating a decrease in consumption that decreases income yet again, and so on. Fill in the following table to show the impact of the change in investment on the first two rounds of consumption spending and, eventually, on total spending and income. Change in Investment == -$200 billion First Change in Consumption Second Change in Consumption Total Change in Spending - - $ $ billion billion billion Now consider the impacts of a change in taxes. The tax multiplier in this question will be spending will change by S billion. thus, if taxes decrease by $-100 billion then
3. Suppose an economy had aggregate demand components with the following relationships: Consumption Spending, C-140 +0.60*(DY) Investment Spending, I-25 +0.15"Y Government Spending, G-0 Net Export Spending, X=0 Tax Collections, Tx = 0 a. What is the equilibrium income for this economy (Show your work)? b. If the Government decided to Increase G spending by 6, what would be the new equilibrium income for this economy (Show your work)? Page 2 bed tooing c. If instead the Government decided to Reduce Tx (taxes) by 10 (i.e., send checks to people), what would be the new equilibrium income for this economy (Show your work)? d. If instead the Government decided to Increase G spending and Increase Tx (taxes) by 20, what would be the new equilibrium income for this economy (Show your work)?
4 HOMEY set of any of yes to $30 -0- -o- My ly Suppose that for every increase in the sterest rate ens peresage the end of westmant spending decies by 565 bon Based on the anes the level of investments to b 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 (ADS) after accounting for the impact of the increase in government purchases on the interest rate and the level of…
7. 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 (ADI). Suppose now that 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 (AD) 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 10 110 108 106 104 102 AD₂ AD AD3 100 100 102 104 106 108 110 112 114 116 OUTPUT (Billions of dollars)
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 (AD₂). Suppose now that 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 AD, by selecting it on the following graph. ? 116 114 112 110 108 106 104 102 100 5 AD₁ 100 0 0 102 104 106 108 110 OUTPUT (Billions of dollars) 112 5 known as the The following graph plots equilibrium in the money market at an interest rate of 3% and a quantity of money equal to $15 billion. Money Supply 114 Show the impact of the Increase in government purchases on the Interest rate by shifting one…
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 (AD). 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 (AD) after the multiplier effect takes place Hint: Be sure the new aggregate demand curve (AD) is parallel to AD, You can see the slope of AD, by selecting it on the following graph. ? 114 112 15.0 110 104 12.5 75 10.0 102 100 2.5 100 105 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. 115 110 120 125 130 135 OUTPUT (lions of dollars) Show the impact of the increase in government purchases on the interest rate by shifting one or both of the curves on the…