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5. Fiscal policy, the money market, and aggregate demand Consider a hypothetical economy in

Question: 5. Fiscal policy, the money market, and aggregate demand Consider a hypothetical economy in which households spend ( $ 0.75 ) of each additional dollar they earn and save the remaining ( $ 0.25 ). The following graph shows the economy’s initial aggregate demand curve ( left(A D_{1}right) ). Suppose the government increases its purchases by ( $ please state graphs clearlyShow transcribed image text 100% (1 rating)This solution is given by sunil Kumar So let’s start the solution according to the question given data is Solution:- Multiplier = 1/(1-MPC)= 1/(1-0.75)=4 Increase in Government purchases= $3.75 billion Change in AD= Multiplier * Change in Government…View the full answerTranscribed image text: 5. Fiscal policy, the money market, and aggregate demand Consider a hypothetical economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. The following graph shows the economy’s initial aggregate demand curve (AD1​). Suppose the government increases its purchases by $3.75 billion. Use the green fine (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 AD1​. You can see the slope of AD1​ by selecting it on the following graph: The following graph shows the money market in equilibrium at an interest rate of 7.5% and a quantity of money equal to $60 billion. Show the impact of the increase in govemment purchases on the interest rate by shifting one or both of the curves on the following graph. Suppose that for each one-percentage-polint increase in the interest rate, the level of investment spending declines by $0.5 bilion. The change in the Interest rate (according to the change you made to the money market in the previous scenario) therefore causes the level of investment spending to by Suppose that for each one-percentage-point increase in the interest rate, the level of investment spending declines by so.5 bilion. The change in the interest rate (according to the change you made to the money market in the previous scenario) therefore causes the level of investment spending to by multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded to by at each price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is effect. Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (ADy) 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 paraliel to AD1​ and AD2​. You can see the slopes of AD1​ and AD2​ by selecting them on the graph. Suppose that for each one-percentage-point increase in the interest rate, the level of investment spending declines by $0.5 billion. The change in the interest rate (according to the change you made to the money market in the previous scenario) therefore causes the level of investment spending to by Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (ADy) 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 AD1​ and AD2​. You can see the slopes of AD1​ and AD2​ by selecting them on the graph. Suppose that for each one-percentage-point increase in the interest rate, the level of investment spending declines by $0.5 bilion. The change in the interest rate (according to the change you made to the money market in the previous scenario) therefore causes the level of investment spending to by After the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded to at each price level. The impact of an increase in government purchases on the interest rate and the level 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 (AD ) 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 AD1​ and AD2​. You can see the slopes of AD1​ and AD2​ by selecting them on the graph. omework (Ch 34) Suppose that for each one-percentage-point increase in the interest rate, the level of investment spending declines by $0.5 billion. The change in the interest rate (according to the change you made to the money market in the previous scenario) therefore causes the level of investment spending to by After the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded to by at each price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is effect. line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (AD 3 ) after accounting for he 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 AD1​ and AD2​. You can see the slopes of AD1​ and AD2​ by selecting them on the graph. Suppose that for each one-percentage-point increase in the interest rate, the level of investment spending declines by $0.5 billion. The change in the interest rate (according to the change you made to the money market in the previous scenario) therefore causes the level of investment spending to by After the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded to at each 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 purpli Ion the graph at the beginning of this problem to show the aggregate demand curve (AD3​) after accounting for the impact of nent purchases on the interest rate and the level of investment spending. Hint: Be sure Imand curve (AD3​) is parallel to AD1​ and AD2​. You can see the slopes of AD1​ and AD2​ by selecting them on the graph.

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