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

5. Fiscal policy, the money market, and agoregate 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 qraph plots the economy's initial aggregate demand arve \( \left(A D_{1}\right) \). Suppose now that the government increases its purchases by \( \$ 3 \) billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD) after the multiplier effect takes placel. Hint: Be sure the new aggregate 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 then following araphi. Use the greent line (thangle symbol) on the following oraph to show the aggregate domand curve \( \left(A D_{2}\right) \) after the multipler effect takis phoce Hint: Be sure the new aggregate dernand curve \( \left(A D_{2}\right) \) is parallel to \( A D_{1} \). You can see the slope of \( A D_{1} \) by sefecting it on the following uriph. The following oraph plots equilizbium in the money market at an interest rate of \( 6 \% \) and a quantity of money equal to \( \$ 45 \) billion. Show the impuct of the increase in government purchases on the interest rate by shitting one or both of the cirvis on the following are Suppose that for every increase in the interest rate of one percentage point, the lavel of investment spending declines by \( 50.5 \) 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 Taking the multiplier effect into account, the change in ipvestment spending will cause the quantity of output demanded to at every price level. The impact of an increase in government purchases on the interest rate and the level of imvestment spending if known as the effect, Use the burpl I on the graph at the beginning of this probiem to show the aggregate demand curve \( \left(A D_{2}\right) \) atter accounting for the imparct of lent purchases on the interest rate and the fevet of investment spending. Hint: Be sure imand curve \( \left(A D_{1}\right) \) is paraliel to \( A D_{1} \) and \( A D_{2} \), you can see the slopes of \( A D_{1} \) and \( A D_{3} \) by selecting them on Suppose that for every increase in the interest rate of one percentage point, the level of investrient spending declines by \( 30.5 \) billion, Based an the changes made to the money market in the previous scenario, the new interest rate causes the level of investment spending to Taking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded to at every price level. The impact of an increase in governnient purchases on the interest rate and the level of investenent spending is known as the effect. Use the purple line (diamond symbel) on the praph at the beglnning of this problem to show the aggregate demand curve (ADy) arten accountino for the impact of the increase in povernment purchases on the interest rate and the level of investrinent \( 5 p e n d i n g \). Hint: Be sure your final aggregate demand curve \( \left(A D_{3}\right) \) is parallel to \( A D_{3} \) and \( A D_{2} \). You can see the slopes of \( A D_{1} \) and \( A D_{2} \) by selecting them an the graph.