Suppose the money market for some hypothetical economy is given by the following graph, which plots the money demand and money supply curves. Assume the central bank in this economy (the Fed) fixes the quantity of money supplied. Suppose the price level decreases from 90 to 75. E A-7 Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money. EI 12 Money Supply O 10 Money Demand Money Supply 6 INTEREST RATE (Percent) Money Demand 2 C- 50 60 10 20 30 40 MONEY (Billions of dollars)Following the price level decrease, the quantity of money demanded at the initial interest rate of 6% will be than the quantity of money supplied by the Fed at this interest rate. As a result, individuals will attempt to their money holdings. In order to do so, they will bonds and other interest-bearing assets, and bond issuers will realize that they interest rates until equilibrium is restored in the money market at an interest rate of % . A-Z The following graph plots the aggregate demand curve for this economy. EI Show the impact of the decrease in the price level by moving the point along the curve or shifting the curve. 15 180 O Aggregate Demand 150 O 120 90 PRICE LEVEL Aggregate Demand 30 O 120 40 60 100 0 20 OUTPUT (Billions of dollars)The following graph plots the aggregate demand curve for this economy. E Show the impact of the decrease in the price level by moving the point along the curve or shifting the curve. A-Z EI 180 O 150 Aggregate Demand 120 O PRICE LEVEL 90 60 Aggregate Demand 30 20 40 60 80 100 120 OUTPUT (Billions of dollars) in residential and business spending, which will cause The change in the interest rate found in the previous task will lead to a in the quantity of output demanded in the economy.X The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it has a central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other world economies). The money market is currently in equilibrium at an interest rate of 5.5% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. A-7 EI 7.5 A 7.0 Money Demand New MS Curve 6.5 6.0 New Equilibrium INTEREST RATE (Percent) 5.5 5.0 2 4.5 4 0 Money Supply 3.5 0 01 0.2 0.3 0.4 0.5 0.6 07 0.8 MONEY (Trillions of dollars) Suppose the Fed announces that it is lowering its target interest rate by 50 basis points, or 0.5 percentage points. To do this, the Fed will use open- the money by the public. market operations toX Suppose the Fed announces that it is lowering its target interest rate by 50 basis points, or 0.5 percentage points. To do this, the Fed will use open- market operations to the money by 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 A-7 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 the cost of borrowing, causing residential and business investment spending to and the quantity of output demanded to at each price level. Shift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand. O Aggregate Demand PRICE LEVELSuppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate will the cost of borrowing, causing residential and business investment spending to E at each price level. and the quantity of output demanded to Shift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand. EI Aggregate Demand PRICE LEVEL Aggregate Demand C- OUTPUTAttempts Keep the Highest / 3 E 4. The multiplier effect of a change in government purchases Suppose there is some hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. The marginal propensity to consume (MPC) for this economy is _, and the spending multiplier for this economy is Suppose the government in this economy decides to decrease government purchases by $250 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to . This decreases income yet again, leading to a second change in consumption equal to . The total change in demand resulting from the initial change in government spending is 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 C- selecting it on the graph.Homework (Ch 21) Q Search this course ? there is no "crowding out." X 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. E A-Z 140 EI AD1 A 135 AD ? 130 125 120 PRICE LEVEL 115 110 105 100 5 6 7 0 2 3 4 OUTPUT (Trillions of dollars)10.0 Money Supply 75 INTEREST RATE A-Z 5. Money Demand EI 2.5 15 30 45 60 75 90 MONEY (Billions of dollars) Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $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 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 effect. C+ Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (AD3) 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 AD, and AD2. You can see the slopes of AD, and AD2 by selecting them on the graph.X The following graph plots an aggregate demand curve. Using the graph, shift the aggregate demand curve to depict the impact that a tax hike has on the economy. E A-7 130 EI O 120 Aggregate Demand 110 100 PRICE LEVEL 90 Aggregate Demand At ? 70 50 60 10 20 30 40 0 OUTPUT Suppose the governments of two very similar economies, economy N and economy M, implement a tax cut of equal size. The tax cut in economy N is permanent, while the tax cut in economy M is temporary. The economies are otherwise completely identical.Homework (Ch 21) I ne ronowing graph plots an aggregate demand curve. X Using the graph, shift the aggregate demand curve to depict the impact that a tax hike has on the economy. E A-Z 130 EI O- 120 Aggregate Demand 10 PRICE LEVEL 100 90 Aggregate Demand 80 ? 70 60 0 10 20 30 40 50 OUTPUT Suppose the governments of two very similar economies, economy N and economy M, implement a tax cut of equal size. The tax cut in economy N is permanent, while the tax cut in economy M is temporary. The economies are otherwise completely identical. The tax cut will have a larger impact on aggregate demand in the economy with theQ Search this course Homework (Ch 21) ? X Should the government use monetary and fiscal policy in an effort to stabilize the economy? The following questions address the issue of how monetary and fiscal policies affect the economy, as well as the pros and cons of using these tools to combat economic fluctuations. The following graph plots hypothetical aggregate demand (AD), short-run aggregate supply (AS), and long-run aggregate supply (LRAS) curves for the U.S. economy in January 2026. A-Z Suppose the government chooses to intervene in order to return the economy to the natural level of output by using policy. EI Depending on which curve is affected by the government policy, shift either the AS curve or the AD curve to reflect the change that would successfully restore the natural level of output. (?) 150 O AS AD 130 AS ? 110 PRICE LEVEL O 90 AD 70 LRAS? 150 O AS 130 AD 110 AS PRICE LEVEL 90 AD 70 LRAS 60 20 22 24 26 28 30 OUTPUT (Trillions of dollars) Suppose that in January 2026 the government successfully carries out the type of policy necessary to restore the natural level of output described in the previous question. In March 2026, U.S. imports increase because the United States has eliminated trade restrictions on Mexican goods. Due to the associated with implementing monetary and fiscal policy, the impact of the government's new policy will likely once the effects of the policy are fully realized. Grade It Now Rava & ContinuaAttempts Keep the Highest / 2 E 8. Using policy to stabilize the economy The government possesses the tools necessary to influence the output level in the short run through use of monetary and fiscal policy. However, there EI is some debate regarding whether the government should attempt to stabilize the economy. Which of the following are arguments in favor of active stabilization policy by the government? Check all that apply. Changes in government purchases and taxation must be passed by both houses of Congress and signed by the president. Businesses make investment plans many months in advance. Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses. The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates. Which of the following policies are examples of automatic stabilizers? Check all that apply. Unemployment insurance benefits The federal funds rate Personal income taxes Grade It Now Save & Continue