Question
7. 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
7. 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 (AD1AD1).
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 (AD2AD2) after the multiplier effect takes place.
Hint: Be sure the new aggregate demand curve (AD2AD2) is parallel to AD1AD1. You can see the slope of AD1AD1by selecting it on the following graph.
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