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 $3.5 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (AD,) is parallel to AD. You can see the slope of AD, by selecting it on the following graph, PRICE LEVEL 116 114 112 110 100 106 104 . 102 100 100 AD 102 106 106 110 OUTPUT (Billions of dollars) 112 104 114 116 AD₁ The following graph plots equilibrium in the money market at an interest rate of 6% and a quantity of money equal to $30 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.
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 $3.5 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (AD,) is parallel to AD. You can see the slope of AD, by selecting it on the following graph, PRICE LEVEL 116 114 112 110 100 106 104 . 102 100 100 AD 102 106 106 110 OUTPUT (Billions of dollars) 112 104 114 116 AD₁ The following graph plots equilibrium in the money market at an interest rate of 6% and a quantity of money equal to $30 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.
Chapter9: Demand-side Equilibrium: Unemployment Or Inflation?
Section9.A: The Simple Algebra Of Income Determination And The Multiplier
Problem 4TY
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