Consider a hypothetical economy' in which households spend $0.50 of each additional dollar thew,r earn and save the remaining $0.50. The following graph shows the economy's inial aggregate demand curve (ADI). Suppose the government increases its purchases by $3.5 billion. Use the green line (triangle symbol) on the followlng graph to Show the aggregate demand curve (1ng alter the multiplier eect takes place. Hint: Be sure the new aggregate demand curve (A32) is parallel to AD]. You can see the slope of AD] by selecting it on the following graph. ('3 113 + 11-1 A02 112 D 1 o 110 _l Lu A03 2:- LIJ | 1m; LIJ E o: '1- 1116 104 1112 1110 1:10 1:12 1:14 106 108 110 112 11-1 115 OUTPUT (Billions of dollars) The following graph shows the money market in equilibrium at an interest rate of 5% and a quantity of money[ equal to $60 billion. Show the impact of the increase in government purchases on the interest rate by shifting one or both of the curves on the foiiowing graph. ('2) 12 Money'Supply + "3 Monev Demand |:| s E Money Supply 4 c: 3 5 + c: \"i E 4 Mon Demand 2 o o 213 40 so so mo 12:: MONEY (Billions of dollars] Suppose that for each onepercentagepoint increase in the interest rate, the level of investment spending declines by $0.5 billion. The change in the interest rate {according to the change vou made to the monev market in the previous scenario) therefore causes the level of investment spending to vby v. After the mulplier effect is accounted for, the change in investment spending will cause the quantity of output demanded to V by v at each price level. 111a impact of an increase in government purchases on the interest rate and the level of investment spending is known as the V effect. Use the pumie tine ( diamond symbol) on the graph at the beginning of this probiem to show the aggregate demand curve (11.01) after accounting for the impact of the increase in government purchases on the interest rate and the ievei of investment spending. Hint: Be sure your nal aggregate demand curve [ADgl is parallel to A31 and A132. You can see the slopes of A131 and .4132 by selectng them on the graph