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 (AD).. 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 multipller 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. (?) PRICE LEVEL 116 114 112 110 108 106 104 102 100 3.0 2.5 20 1.0 The following graph plots equilibrium in the money market at an Interest rate of 1.5% and a quantity of money equal to $45 billion. 0.5 AD₁ 100 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. (?) 0 0 102 104 106 108 110 112 114 116 OUTPUT (Billions of dollars) 15 known as the Money Supply Money Demand 30 45 60 MONEY (Billions of dollars) AD₂ 75 AD₂ 90 Money Demand Money Supply Suppose that for every increase in the Interest rate of one percentage point, the level of investment spending declines by $1 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 multipller effect into account, the change in investment spending will cause the quantity of output demanded to 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 (AD) 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 (AD)) is parallel to AD, and AD). You can see the slopes of AD, and AD, by selecting them on the graph.
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 (AD).. 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 multipller 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. (?) PRICE LEVEL 116 114 112 110 108 106 104 102 100 3.0 2.5 20 1.0 The following graph plots equilibrium in the money market at an Interest rate of 1.5% and a quantity of money equal to $45 billion. 0.5 AD₁ 100 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. (?) 0 0 102 104 106 108 110 112 114 116 OUTPUT (Billions of dollars) 15 known as the Money Supply Money Demand 30 45 60 MONEY (Billions of dollars) AD₂ 75 AD₂ 90 Money Demand Money Supply Suppose that for every increase in the Interest rate of one percentage point, the level of investment spending declines by $1 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 multipller effect into account, the change in investment spending will cause the quantity of output demanded to 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 (AD) 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 (AD)) is parallel to AD, and AD). You can see the slopes of AD, and AD, by selecting them on the graph.
Chapter9: Demand-side Equilibrium: Unemployment Or Inflation?
Section9.A: The Simple Algebra Of Income Determination And The Multiplier
Problem 4TY
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Transcribed Image Text: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 (AD₂).
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 (AD) is parallel to AD. You can see the slope of AD, by selecting it on the following graph.
@
PRICE LEVEL
116
114
112
INTEREST RATE
110
108
106
104
102
100
AD₁
100
3.0
0
102
The following graph plots equilibrium in the money market at an interest rate of 1.5% and a quantity of money equal to $45 billion.
Money Supply
2.5
2.0
4
1.5
1.0
0.5
15
0
104 105 108 110
OUTPUT (Billions of dollars)
112 114 116
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.
known as the
Money Demand
30
45
60
MONEY (Billions of dollars)
AD₂
75
AD₂
90
Money Demand
Money Supply
(?)
Suppose that for every Increase in the interest rate of one percentage point, the level of investment spending declines by $1 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
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 (AD) 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 (AD) is parallel to AD, and AD₂. You can see the slopes of AD, and AD₂ by selecting them on the
graph.
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