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 (AD1).

Suppose the government increases its purchases by $3 billion.

Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD2) after the multiplier effect takes place.

Hint: Be sure the new aggregate demand curve (AD2) is parallel toAD1. You can see the slope of AD1by selecting it on the following graph.

Show the impact of the increase in govemment purchases on the interest rate by shifting one or both of the curves on the foilewr'ng graph. CD Money'Suppiy o 5 MoneyI Demand |:I 4 _ _ _ _ _ _ _ _ _+ Money Suppiy INTEREST RATE m D 10 2'0 30 40 53 50 MONEY [Billons Of dollars} Suppose that for each one-peroentage-point increase in the interest rate, the level of investment spending declines bv $0.5 billion. The change in the interest rate (according to the change you made to the money market in the previous scenario) therefore causes the level of investment spending to fall V by $0.25 billion V . After the mulplier effect is acoounted for, the change in investment spending will cause the quantity of output demanded to decrease v by $1 billion V at each price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is known as the crowdingout V effect