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 $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.

116 A 114 AD 2 112 AD 110 AD 3 108 PRICE LEVEL 106 104 102 100 100 105 110 115 120 125 130 135 140 OUTPUT (Billions of dollars)The following graph shows the money market in equilibrium at an interest rate of 7.5% 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. 15.0 Money Supply O 12.5 Money Demand 10.0 Money Supply 7.5 INTEREST RATE 5.0 Money Demand 2.5 0 15 30 45 60 75 90 MONEY (Billions of dollars)