Assume the economy is at full employment with output of $1000 billion and the price level at 100. Suppose then that there is an increase in government spending causing aggregate demand to increase by $24 billion. This increase in aggregate demand causes inflation to increase above the 2% target. To restore the economy to full employment, the Federal Reserve decides to take action. The current interest rate (after the shift in aggregate demand) is 3% and the current level of investment is $15 billion. MPC in the economy is 0.55 Draw 3 graphs to demonstrate the changes in the overall economy, the Investment demand, and the money market. Show all appropriate calculations and put the numbers you have on your graphs. (Hints: You will not have numbers for money supply or the new interest rate but be sure to demonstrate the direction of change on your graphs. Round your change in investment to a whole number.)

1. Draw your graphs on a piece of paper.

2. Clearly label all axes and lines on each graph. Present all relevant information (including numbers for the AD, the multiplier, and the new level of investment.