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Fiscal policy, the money market, and aggregate demand Consider a hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The following graph shows the economy's initial aggregate demand curve ( ). Suppose the government increases its purchases by $3 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve ( ) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve ( ) is parallel to . You can see the slope of by selecting it on the following graph. AD 2 AD 3 100 102 104 106 108 110 112 114 116 116 114 112 110 108 106 104 102 100 PRICE LEVEL OUTPUT (Billions of dollars) AD 1 The following graph shows the money market in equilibrium at an interest rate of 6% and a quantity of money equal to $45 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. Money Demand Money Supply 0 15 30 45 60 75 90 12 10 8 6 4 2 0 INTEREST RATE MONEY (Billions of dollars) Money Demand Money Supply 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 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 ( ) 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 ( ) is parallel to and . You can see the slopes of and by selecting them on the graph.
What would it take for a point beyond the PPF to ultimately become attainable? Name an important assumption associated with the PPF. Why are models such as the PPF which require broad assumptions used in economics?
Illustrate what is the capital account balance. Illustrate what is the financial account balance.
Levi’s has an advertising slogan: “Quality never goes out of style.” Consumers can buy other kinds of jeans, including off-brands. The manufacturers of off-brand, or generic, jeans do not advertise. Create a graph showing the price (labeled as P1) th..
How much interest is payable each year on a loan of $1000 if the interest rate is 9% per year when half of the loan principal will be repaid as a lump sum at the end of 3 years and the other half will be repaid in one lump-sum amount at the end of 6 ..
Large-scale wars typically bring a suspension of international trading and financial activities. Exchange rates lose much of their relevance under these conditions, but once the war is over governments wishing to fix exchange rates face the problem o..
A car dealership typically determines a distinct price for a car for each customer. This is an example of what type of price discrimination? Why is the dealership able to carry out this type of price discrimination?
Back in the 1950's a piece of gum was 5 cents and today it is $1. Inflation has occured so that does that mean that people can afford to have less gum? Do they have less purchasing power? Explain please.
What is the significancee of this opportunity cost to the search for better technology to reduce pollution?
Suppose that some foreign countries begin to subsidize investment by instituting an investment tax credit. What happens to the investment in our small open economy? What happens to our trade balance? What happens to our real exchange rate?
Calculate dollar rates of return on a deposit 10,000 pounds in a London bank in a year when interest rate on pounds is 10 percent and dollar/pound exchange rate moves from 1.50 dollars per pound to 1.38 dollars per pound.
Define and explain the money multiplier. Identify the change to the money supply in the following situation: The required reserve ratio is 12.5 percent and the Fed increases the monetary base by $100.
Suppose the number of officially classified employed persons equals 80 million people; the number of discouraged workers is 12 million people; the number of stay at home spouses is 15 million people; the number of underemployed workers is 9 million p..
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