Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declinesby $0.5 billion. Based on the changes made to the money market in the previous scenario, the new interest rate causes the level of investment spending tofall by$0.5 billion .

Taking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded toincrease by$0.8 billion 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 effect.

Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (AD3AD3) after accounting for the impact of the increase in government purchases on the interest rate and the level of investment spending.