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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 (AD1AD1).Suppose now that the government increases its purchases by $2.5 billion.

How do I correct the plot ?

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 (AD2) 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. 116 114 AD 2 112 AD 110 AD 3 108 PRICE LEVEL 108 104 102 100 100 102 104 106 108 110 112 114 116 OUTPUT (Billions of dollars) The following graph plots equilibrium in the money market at an interest rate of 6% and a quantity of money equal to $60 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.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. @ Money Supply o e 1 Money Demand o s ) Money Supply INTEREST RATE @ 4 L Money Demand 2 0 0 20 40 6 80 100 120 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 w effect. 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 ADy and ADs. You can see the slopes of AD; and ADs by selecting them on the graph. To illustrate the impact of the increase in government purchases on the interest rate, we need to show how the aggregate demand curve (AD) shifts due to the multiplier effect. Since the multiplier effect is proportional to the change in government purchases, we'll see a parallel shift in the AD curve. The new AD curve (AD,) will be parallel to the initial AD curve (AD,) but shifted upwards by the amount of the increase in government purchases. Let's denote the initial equilibrium interest rate as 6% and the quantity of money as $60 billion. When government purchases increase by $2.5 billion, the AD curve shifts to the right, reflecting the increase in aggregate demand due to higher government spending. To show this on the graph, we'll use the green line (triangle symbol) to represent the new AD curve (AD,), parallel to AD, but shifted upwards. This shift indicates an increase in both the equilibrium output level and the price level in the economy. Additionally, the higher level of output and aggregate demand would put upward pressure on interest rates in the money market. By shifting the AD curve to the right, we can visually represent how the increase in government purchases influences the equilibrium in the economy, impacting both output and the interest rate