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 $2 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.

Orin v CENGAGE | MINDTAP Q Search this course My Home Module Six Quiz X Courses (? Catalog and Study Tools 116 A-Z Rental Options 114 College Success Tips AD 2 12 AD 1 Career Success Tips 110 AD , Help PRICE LE Give Feedback 106 104 102 100 100 102 104 106 108 110 112 114 116 OUTPUT (Billions of dollars) The following graph shows the money market in equilibrium at an interest rate of 1.5% and a quantity of money equal to $45 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. Money Supply O 2.5 Money Demand 2.0 Money Supply INTEREST RATE Moray Demand 0.5 15 30 45 60 75 MONEY (Billions of dollars) Suppose that for each one-percentage-point ment spending declines by $1 billion. The change in the Interest rate (according to the change you mad uses the level of investment spending to by After the multiplier effect is accounted for, the change in in spending will t demanded to by at each price level. The imp est rate and the level of investment spending is known as the 7 effect. Use the purple line (diamond demand curve (ADs) after accounting for the impact of the increase vestment spending. Hint: Be sure your final aggregate de urve (ADs) is parallel to AD, and AD2. You can see the slopes of AD, and AD2 by selecting them on the graph