Homework (Ch 34) Attempt Kemp the richest / G 5. Fiscal policy, the money market, and aggregate demand Consider a hypothetical economy in which households spand $0.50 of each additional dollar they earn and save the remaining $0.50. The following graph shows the sconomy's initial aggregate demand curve (AP, ). Supperin the government increases its purchases by $3.5 billion. Use the green line (inangle symbol) on the following graph to show the aggrega amaned curve ( AP) after the avitiphior affect takes place. Hint: Be sure the new aggregate demand curve ( All,] is parallel to ADD). You can see the slope of AD, by selecting it on the following graph. 150 PRICE LEVEL 453 121 150 154 OUTPUT (Bilions of dollars) The following graph shows the money market in equilibrium at an interest rate of 6%% and a quantity of money equal in $60 billion. Show the Mipact of wa increased in government purchases on the interest rate by shifting one or both of what curves on the following graph. (? Morery Supply Morning Demand Money Supply INTEREST RATE 100 MONEY (Bilions of dollars) Support that for each one-percentage point increase in the interest rate, the level of investment spending declines by $0.5 bullion. The change in the interest rate faccording to the change you made to the money market in the previous scanario] thanfore carries the level of inailment spending to After the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded in_ by 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 Lise the purple line {diamond symbol) on the graph at the baginning of this problem to show the aggregate demand curve (AP) after accounting for the impact of the increase in government purchases on the interest rate and the loved of investment spending. Hint: Ba sure your final aggregate demand curve (APJy] is parallel to A), and AD. You can see the slopes of AD, and Ally by selecting tham an the graph