S. Fiscal policy, the money market, and aggregate demand Consider a hypothetical
ID: 1227855 • Letter: S
Question
S. 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 (AD Suppose the government increases its purchases by $2.5 billion. ine (oringe smbol on hetolin Use the green line (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 AD. You can see the slope of ADI by selecting it on the following graplh 116 114 AD 2 112 110t 108 0Y 106 t 104 T 102t 100 00 102 104 106 108 110 112 114 116 OUTPUT (Billions of dollars)Explanation / Answer
1) The MPC is just 0.5, so government spending is 2.5 billion then only 1.25 billion increase will take place
2) Here intrest rate have increased by 0.5% then you must say the decrease will be 0.5 billion
3) As MPC in this particular scenario is 0.5 then 0.5*0.5 = 0.25 billion
4) Yes true crowding effect
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