7. Fiscal policy, the moneyr market, and aggregate demand Consider a hypothetical economy in which households spend $0.50 of each additional dollar they earn and saye the remaining 50.50. The following graph shows the economy's initial aggregate demand curye(AD1). Suppose the government increases its purchases by 53 billion. Use the green line {triangle symbol) on. the Following graph to show the aggregate demand curve 1' A139} alter the multiplier effect takes place. Hint: Be sure the new aggregate demand curye (AD?) is parallel to AD]. You can see the slope of AD] by selecting it on the following graph. 115 A 114 l\\D1 112 AD] _o_ 11: | AD L\" 3 :3 LIJ ' 1:3 LIJ 2 o: 0 1:5 1:4 1:: 1:: 132 1:4 136 1:3 11: 112 114 11a OUTPUT [Billions ofdollars} The following graph shows the money market in equilibrium at an interest rate of 1.5% and a quantity of money equal to 530 billion