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. (? 18 Money Supply O 15 Money Demand 12 Money Supply INTEREST RATE (Percent) Money Demand 3 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 9% will be than the quantity of money supplied by the Fed at this interest rate. People will try to their money holdings. In order to do so, people will bonds and other interest-bearing assets, and bond issuers will find that they 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.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 90 PRICE LEVEL 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.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 wor1d). 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. ('2) 6.0 v + 5.5 New MS Curve Money Demand 5.0 - II- New Equilibrium INTEREST RATE (Percent) Money Supply a 0.1 0.2 0.3 0.4 0.5 0.5 0.7 0.3 MONEY (T rillions of dollars) 2.0 + | I l l | 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 7 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 7 the cost of borrowing, causing residential and business investment spending to V and the quantity of output demanded to V 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 LEVEL Aggregate Demand OUTPUTThe following graph shows the aggregate demand curve. Shift the aggregate demand curve on the graph to show the impact of a tax hike. (?) 130 O 120 Aggregate Demand 110 100 PRICE LEVEL 90 Aggregate Demand 80 70 10 20 30 40 50 60 OUTPUT Suppose the governments of two different economies, economy J and economy K, implement a permanent tax cut of the same size. The marginal propensity to consume (MPC) in economy ] is 0.85 and the MPC in economy K is 0.8. The economies are identical in all other respects. The tax cut will have a larger impact on aggregate demand in the economy with theShould 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, and the pros and cons of using these tools to combat economic fluctuations. The following graph shows a hypothetical aggregate demand curve (AD), short-run aggregate supply curve (AS), and long-run aggregate supply curve (LRAS) for the U.S. economy in April 2023. Suppose the government decides to intervene to bring the economy back to the natural level of output by using policy. 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 AS AD 130 110 AS PRICE LEVEL 90 AD 70 LRAS 50 20 22 24 26 28 30 OUTPUT (Trillions of dollars) Suppose that in April the government undertakes the type of policy that is necessary to bring the economy back to the natural level of output in the preceding scenario. In June 2023, U.S. imports decrease because the United States has implemented trade restrictions on French goods. Because of the Z 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.The government has the ability to influence the level of output in the short run using monetary and fiscal policy. There is some disagreement as to 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. Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses. Businesses make investment plans many months in advance. The current tax system acts as an automatic stabilizer. The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates. Which of the following are examples of automatic stabilizers? Check all that apply. Corporate income taxes O Personal income taxes O Unemployment insurance benefits