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Fiscal policy, the money market, and aggregate demand Suppose there is some hypothetical economy in which households spend $0.50 of each additional dollar they earn

Fiscal policy, the money market, and aggregate demand

Suppose there is some hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the $0.50 they have left over. The following graph plots the economy's initial aggregate demand curve (AD1AD1).

Suppose now that the government increases its purchases by $2.5 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.

image text in transcribedimage text in transcribed
\f12 Money Supply O 10 Money Demand O 8 Money Supply 6 INTEREST RATE 4 Money Demand 2 0 0 5 10 15 20 25 30 MONEY (Billions of dollars)

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