(Solved): 5. Fiscal policy, the money market, and aggregate demand Suppose there is some hypothetical economy ...

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 \( \left(A D_{L}\right) \). 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 \( \left(A D_{2}\right) \) atter the multiplier effect takes place. Hint: Be sure the new agoregate demand curve \( \left(A D_{2}\right. \) is parallel to \( A D_{1} \). You can see the slope of \( A D_{1} \) by selecting it on the following graph. The following graph plots equilibrium in the money marhet at an interest rate of b\% and a quantify of money equal to 530 billion. Show the impuct of the increase in povernment purcuses on the interest rate by shifing ane or both of the curvs on the following gnahh. thanges thade to the moseer market in the prevlout weetario, the new interest rate cayses the litwil of lavetiment soencing to at every price leval. The impact of an incresse in gwemment purchases on the inkerest rate and the level of investment soending is knoen as the elfect. the graph: