Note: the answer should be typed.

5. 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 (AD, ). 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 (AD ) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (AD2) is parallel to AD . You can see the slope of AD by selecting it on the following graph. (?) 1 18 A AD , 1 12 TAD 1 10 PRICE LEVEL 106 104 100 100 100 104 110 114 115 102 OUTPUT (Billions of dollars) The following graph plots equilibrium in the money market at an interest rate of 1.5% and a quantity of money equal to $15 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. ?) 30 Money Supply Money Demand 25 20 Money Supply INTEREST RATE 15 10 Money Demand 10 15 20 25 MONEY (Billions of dollars)over. I ne migwing graph piers one cronomy's iniai aggregate demand curve (/wj ). 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 (AD ) after the mulboiler effect takes place. Hint: Be sure the new aggregate demand curve (AD:) is parallel to AD . You can see the slope of AD by selecting it on the following graph. (?) 118 A 174 AD ., 112 AD 110 AD , PRICE LEVEL 10G 10 100 100 102 104 106 109 110 @ 112 114 115 OUTPUT (Billions of dollars) The following graph plots equilibrium in the money market at an interest rate of 1.5% and a quantity of money equal to $15 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. (?) 30 Money Supply 25 Money Demand 20 Money Supply INTEREST RATE 15 10 Money Demand 05 5 10 15 20 25 MONEY (Billions of dollars) Suppose that for every increase in the interest rate of ane percentage point, the level of investment spending declines by $1 billion. Based on the changes made to the money market in the previous scenario, the new interest rate causes the level of investment spending to * by Taking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded to by at every price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is known as the 7 effect. Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (AD),) after accounting for the Impact of the increase in goverment purchases on the Interest rate and the level of Investment spending. Hint: Be sure your final aggregate demand curve (AD: ] is parallel to AD, and AD: . You can see the slopes of AD, and AD, by selecting them on the graph