Please solve questions, and shift the graphs where it needs to be.

2.

2. The theory of liquidity preference and the downward-slopingaggregate demand curve The following graph shows the money market in a hypothetical economy. The central bank in this economy is called the Fed. Assume that the Fed fixes the quantity of money supplied. Suppose the price level increases from 90 to 105. Shift the appropriate curve on the graph to show the impact of an increase in the overall price level on the market for money. 12 Money Supply O 10 Money Demand Money Supply 6 INTEREST RATE (Percent) Money Demand 2 20 40 60 80 100 120 MONEY (Billions of dollars)After the increase in the price level, the quantity of money demanded at the initial interest rate of 6% will be V than the quantity of money supplied by the Fed at this interest rate. People will try to V their money holdings. In order to do so, people will V bonds and other interestbearing assets, and bond issuers will find that they V interest rates until the money market reaches its new equilibrium at an interest rate of|:]. The following graph shows the economy's aggregate demand curve. After the increase in the price level, the quantity of money demanded at the initial interest rate of 6% will be V than the quantity of money supplied by the Fed at this interest rate. People will try to V their money holdings. In order to d - will V bonds and other interest-bearing assets, and bond issuers will find that they V interest rates until th.- arket reaches its new equilibrium at an interest rate of \"/0 . The following graph shows the economy's aggregate demand curve. After the increase in the price level, the quantity of money demanded at the initial interest rate of 6% will be V than the quantity of money supplied by the Fed at this interest rate. People will try to V their money holdings. In order to do so, people will V bonds and other V interest rates until the money market reaches its new interest-bearing assets, and bond issuers will find that th- equilibrium at an interest rate of \"/0 . decrease increase The following graph shows the economy's aggregate dem. After the increase in the price level, the quantity of money demanded at the initial interest rate of 6% will be V than the quantity of money supplied by the Fed at this interest rate. People will try to V their money holdings. In order to do so, people will V bonds and other interest-bearing assets, and bond issuers will find that they V interest rates until the money market its new equilibrium at an interest rate of \"/0 . buy The following graph shows the economy's aggregate demand curve. After the increase in the price level, the quantity of money demanded at the initial interest rate of 6% will be V than the quantity of money supplied by the Fed at this interest rate. People will try to V their money holdings. In order to do so, people will V bonds and other V interest rates until the money market reaches its new interest-bearing assets, and bond issuers will find that they equilibrium at an interest rate of \"/0 . The following graph shows the economy's aggregate deman can offer lower have to offer higher Show the impact of the increase in the price level by moving the point along the curve or shifting the curve. 180 O 150 Aggregate Demand O 120 PRICE LEVEL 90 60 Aggregate Demand 30 40 80 120 160 200 240 OUTPUT (Billions of dollars) The change in the interest rate that you found previously will cause residential and business investment spending to , leading to in the quantity of output demanded in the economy.Show the impact of the increase in the price level by moving the point along the curve or shifting the curve. 180 O 150 Aggregate Demand O 120 PRICE LEVEL 90 60 Aggregate Demand 30 40 80 120 160 200 240 OUTPUT (Billions of dollars) rise fall The change in the interest rate that you found previously will cause residential and business investment spending to , leading to in the quantity of output demanded in the economy.Show the impact of the increase in the price level by moving the point along the curve or shifting the curve. 180 O 150 Aggregate Demand O 120 PRICE LEVEL 90 60 Aggregate Demand 30 40 80 120 160 200 240 OUTPUT (Billions of dollars) an increase a decrease the interest rate that you found previously will cause residential and business investment spending to , leading to in the quantity of output demanded in the economy.3. Changes in the money supply The following graph represents the money market in a hypothetical economy. As in the United States, this economy has a central bank called the Fed, but unlike in the United States, the economy is closed (that is, the economy does not interact with other economies in the world). The money market is currently in equilibrium at an interest rate of 4% and a quantity of money equal to $0.4 trillion, as indicated by the grey star. 6.0 5.5 New MS Curve Money Demand 5.0 + 4.5 New Equilibrium 4.0 INTEREST RATE (Percent) 3. 3.0 2.5 Money Supply 2.0 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 MONEY (Trillions of dollars)Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage point. To do this, the Fed will use open- market operations to Y the Y money by V the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in the correct location. Place the black paint (plus symbol) at the new equilibrium interest rate and quantity of money. Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate will V the cost of borrowing, causing residential and business investment spending to V and the quantity of output demanded to V at each price level. Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage point. To do this, the Fed will use open- market operations to Y the Y money by V the public. Use the green line (t - ol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in the increase oint (plus symbol) at the new equilibrium interest rate and quantity of money. Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate will V the cost of borrowing, causing residential and business investment spending to V and the quantity of output demanded to V at each price level. Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage point. To do this, the Fed will use open- market operations to Y the V _ money by V the public. supply of Use the green line (triangle symbol) on t - =ph to illustrate the effects of this policy by placing the new money supply curve (MS) in the demand for correct location. Place the black paint (pl he new equilibrium interest rate and quantity of money. Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate will V the cost of borrowing, causing residential and business investment spending to V and the quantity of output demanded to V at each price level. Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage point. To do this, the Fed will use open- market operations to Y the Y money by V the public. selling bonds to Use the green line (triangle symbol) on the previous graph to illustrat. = icy by placing the new money supply curve (MS) in the buying bonds from correct location. Place the black paint (plus symbol) at the new equiiib quantity of money. Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate will V the cost of borrowing, causing residential and business investment spending to V and the quantity of output demanded to V at each price level. Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage point. To do this, the Fed will use open market operations to V the V money by V the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in the correct location. Place the black paint (plus symbol) at the new equilibrium interest rate and quantity of money. Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate will V the cost of borrowing, causing residential and business investment spending to V and the quantity of output demanded to V at each price level. ' increase red uce ve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand. Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage point. To do this, the Fed will use open market operations to V the V money by V the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in the correct location. Place the black paint (plus symbol) at the new equilibrium interest rate and quantity of money. Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate will V the cost of borrowing, causing residential and business investment spending to V and the quantity of output demanded to increase V at each price level. d ecrease Shift the curve on the graph to show the general impact of the Fed's new interest rate target a demand. Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage point. To do this, the Fed will use open- market operations to V the V money by V the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in the correct location. Place the black point (plus symbol) at the new equilibrium interest rate and quantity of money. Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate will V the cost of borrowing, causing residential and business investment spending to V and the quantity of output demanded to V at each price level. decrease '= ve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand. increase /;\\ Shift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand. x C?) 0 Aggregate Demand PRICE LEVEL Aggregate Demand OUTPUT 4. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The marginal propensity to consume (MPC) for this economy is V , and the spending multiplier for this economy is Y . Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to V . This increases income yet again, causing a second change in consumption equal to V . The total change in demand resulting from the initial change in government spending is V 4. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The marginal propensity to consume (MPC) for this economy is V , and the spending multiplier for this economy is Y . Suppose the government in this economy decides to increase ent purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consu uual to V . This increases income yet again, causing a second change in consumption equal to V . change in demand resulting from the initial change in government spending is V The following graph shows the aggregate demand curve (ADl) economy before the change in government spending. 4. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The marginal propensity to consume (MPC) for this economy is V , and the spending multiplier for this economy is _V Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in ent purchases will lead to an increase in income, generating an initial change in consumption equal to V . This increases in! again, causing a second change in consumption equal to V . The total change in demand resulting from the initial ch -overnment spending is V The following graph shows the aggregate demand curve (ADl) for this economy before the change in government spe 4. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The marginal propensity to consume (MPC) for this economy is V , and the spending multiplier for this economy is Y . Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to V . This increases income yet again, causing a second change in consumption equal to V . The total chang Iting from the initial change in government spending is V $160 billion $1,000 billion The following graph shows the aggregate demand curve (ADl) for this econo nge in government spending. $500 billion $240 billion Use the green line (triangle symbol) to plot the new aggregate demand curve ultiplier effect takes place. For simplicity, assume that there is no "crowding out. " $120 billion 4. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The marginal propensity to consume (MPC) for this economy is V , and the spending multiplier for this economy is V . Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to V . This increases income yet again, causing a second change in consumption equal to V . The total change in demand resulting from the initial change in government spending is V $160 billion The following graph shows the aggregat $120 billion (ADl) for this economy before the change in government spending. $500 billion Use the green line (triangle symbol) to I egate demand curve (ADZ) after the multiplier effect takes place. For simplicity, assume that . . $1,000 billion there iS no "crowding out. " $144 billion Hint: Be sure that the new aggregate d I2) is parallel to the initial aggregate demand curve (ADl). You can see the slope ofAD1 by 4. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The marginal propensity to consume (MPC) for this economy is V , and the spending multiplier for this economy is V . Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to Y . This increases income yet again, causing a second change in consumption equal to Y . The total change in demand resulting from the initial change in government spending is V $2'4 trillion raph shows the aggregate demand curve (ADI) for this economy before the change in government spending. $0.8 trillion $1 trillion ine (triangle symbol) to plot the new aggregate demand curve (A02) after the multiplier effect takes place. For simpficity, assume that wding out. " $0.6 trillion .,,......, ,,,..,..,....,.... ,44n\\',,, ,n...,..,,.r...,i,..,,,.,..,..,,.i. ,IAn\\u, .,...,..,,.i....pAn .. The following graph shows the aggregate demand curve (AD, ) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD2) after the multiplier effect takes place. For simplicity, assume that there is no "crowding out." Hint: Be sure that the new aggregate demand curve (AD2 ) is parallel to the initial aggregate demand curve (AD] ). You can see the slope of AD, by selecting it on the graph. 140 AD A 135 AD 2 130 125 120 PRICE LEVEL 115 110 105 100 2 3 4 5 6 7 OUTPUT (Trillions of dollars)5. Fiscal policy, the money market, and aggregate demand 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 (ADl). Suppose 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 (AD2) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (AD2 ) is parallel to AD1 . You can see the slope of AD, by selecting it on the following graph. 116 A 114 AD 2 112 AD 110 AD 3 108 PRICE LEVEL 106 104 102 100 100 102 104 106 108 110 112 114 116 OUTPUT (Billions of dollars)The following graph shows the money market in equilibrium at an interest rate of 3% 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. 6 Money Supply O 5 Money Demand O Money Supply 3 INTEREST RATE 2 Money Demand 1 0 5 10 15 20 25 30 MONEY (Billions of dollars)Suppose that for each onepercentagepoint increase in the interest rate, the level of investment spending declines by $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 _'bY'- After the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded to V by 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 V effect. Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (ADg) after accounting for the impact of the increase in government purchases on the interest rate and the level of investment spending. Hint: Be sure your final aggregate demand curve (AD3) is parallel to AD1 and AD2. You can see the slopes of AD1 and AD; by selecting them on the graph. Suppose that for each onepercentagepoint increase in the interest rate, the level of investment spending declines by $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 _'bY'- multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded to V by V at each price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is -s the V effect. Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (ADg) after accounting for the impact of the increase in government purchases on the interest rate and the level of investment spending. Hint: Be sure your final aggregate demand curve (AD3) is parallel to AD1 and AD2. You can see the slopes of AD1 and AD; by selecting them on the graph. Suppose that for each onepercentagepoint increase in the interest rate, the level of investment spending declines by $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 _'bY' After the $05 bllhon is accounted for, the change in investment spending will cause the quantity of output demanded to V by $1 billion h price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is known as V effect. $0.25 billion Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (A03) after accounting for the impact of the increase in government purchases on the interest rate and the level of investment spending. Hint: Be sure your final aggregate demand curve (AD3) is parallel to AD1 and AD2. You can see the slopes of AD1 and AD; by selecting them on the graph. Suppose that for each onepercentagepoint increase in the interest rate, the level of investment spending declines by $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 _'bY'- After the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded to V by V at each price level. The impact of an increase in government purchases on the interest rate and the level increase known as the V effect. - decrease Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (ADg) after accounting for the impact of the increase in government purchases on the interest rate and the level of investment spending. Hint: Be sure your final aggregate demand curve (AD3) is parallel to AD1 and AD2. You can see the slopes of AD1 and AD; by selecting them on the graph. Suppose that for each onepercentagepoint increase in the interest rate, the level of investment spending declines by $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 _'bY'- After the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded to V by V at each price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is V effect. $0.4 billion $05 bllllon line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (A03) after accounting for $1 billion he increase in government purchases on the interest rate and the level of investment spending. Hint: Be sure your final aggregate demand curve (AD3) is parallel to AD1 and AD2. You can see the slopes of AD1 and AD; by selecting them on the graph. Suppose that for each onepercentagepoint increase in the interest rate, the level of investment spending declines by $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 _'bY'- After the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded to V by 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 V effect. liquidity preference Use the purpl ) on the graph at the beginning of this problem to show the aggregate demand curve (A03) after accounting for multiplier the impact of ent purchases on the interest rate and the level of investment spending. crowdingout Hint: Be sure emand curve (AD3) is parallel to AD1 and AD2. You can see the slopes ofAD1 and AD; by selecting them on the graph. automatic stabilizer