Question

Use the following graphs to answer the next question.

In the graphs, the numbers in parentheses near the AD₁, AD₂, and AD₃ labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point C on the investment demand curve. To achieve the long-run goal of a noninflationary, full-employment output of Q_f in the economy, the Fed should try to _____.

a. increase aggregate demand by increasing the interest rate

b. increase aggregate demand by decreasing the interest rate

c. make no change in the interest rate

Use the following graphs to answer the next question.​

In the graphs, the numbers in parentheses near the AD₁, AD₂, and AD₃ labels indicate the levels of investment spending associated with each curve. All figures are in billions. What is the desired level of investment spending in this economy if the goal is to achieve a noninflationary, full-employment level of real GDP?​

a. $50 billion

b. $100 billion

c. $225 billion

Answer 1

Answer : 1) The answer is option c.

At Qf output level the aggregate demand curve is AD2 where the investment level is $90 billion. As the economy is at point c on Investment Demand curve where the investment level is $90 billion and the interest rate is 6%. As the Qf output level requires $90 billion investment spending and the economy has already the investment spending of $90 billion, so the Fed should not try to change the interest rate to achieve Qf output level in the economy.

2) The answer is option b.

In the given diagram, the noninflationary and full-employment level of real GDP is Qf where aggregate demand curve is AD2. The AD2 curve shows that at Qf output level the investment spending requires $100 billion. Therefore, option b is correct.