<img alt="4. 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 followi graph shows the economys 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 ADi by selecting it on the following graph 2 116 114 AD AD 110 AD 108 0r 106 104 102 100 100 102 104108 110 112 114 118 OUTPUT (Billions of dollars) The following graph shows the money market in equilibrium at an interest rate of 3% and a quantity of money equal to $30 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." src="//img.homeworklib.com/questions/f2ca8300-3e8c-11eb-90f8-097674aa8868.png" aria-describedby="jt3"/><img alt="" src="//img.homeworklib.com/questions/f36f4260-3e8c-11eb-af5c-67e67a54d37f.png" />4. 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 $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.

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Consider a hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the remaining $0.50.

4. 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 $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.

Solutions

Expert Solution

Household spending is $0.50. Household saving is $0.50. Government increases its purchases is $3.5 billion. Money market equi Aggregate demand: The change in aggregate demand can be calculated as follows: An increase in government spending increases t Figure - 1 shows the aggregate demand curve after multiplier effect as follows: Figure - 1 120 118 116 114 112 Price level 11 The initial aggregate demand curve is AD1 is indicated the initial level of consumption. When the goverment spending increase Figure - 2 shows the impact of increase in government on money market as follows: Figure - 2 Money supply 5 Interest rate 2 M In the above diagram. interest rate is increases by 0.5 points. Thus, it reduces the spending by Slbillion (2x0.5). Thus, inc Figure -3 shows the impact on aggregate demand curve as an impact of increase in government spending on interest rate and lev Figure - 3 120 118 116 114 112 Price level AD 3 110 108 106 104 102 AD2 AD1 100 100 102 104 106 108 110 112 114 116 118 120 O

Rahul Sunny answered 2 years ago

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