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 graph shows the economy's initial aggregate demand curve (AD) remaining $0.50. The following Suppose the government increases its purchases by $2.5 billion. on the following oraph to show the aggregate demand curve (AD2) after the multiplier effect takes place. Be sure the new apgregate demand curve (AD) is parallel to AD,. You can see the slope of ADj by selecting it on the following graph. 114 AD 112 110 AD, 108 104 102 110 112 114 001024108 OUTPUT (Bitions of oollars The following graph shows the money market in equilibrium at an interest rate of 3% and a quantity of money equal to $15 billion. Money Supply Money Demand Money Supply Demand Money 15 20 30 25 MONEY (Bilions of dolars) Suppose that for each one-percentage-point increase in the interest rate, the level of investment spending declines by so.S tillion. The change in the 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 at each price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is effect. known as the on the graph at the beginning of this problem to show the aggregate demand curve (ADs) after accounting for and the level of investment spending. the impact of the increase in government purchases on the interest rate e demand curve (ADs) is parallel to AD, and ADs. You can see the slopes of ADi and AD, by selecting them