15. Fiscal policy, the money market, and aggregate demand Aa Aa Consider a hypot

Question

15. Fiscal policy, the money market, and aggregate demand Aa Aa Consider a hypothetical economy where households spend $0.80 of each additional dollar they earn and save the remaining $0.20. The following graph shows the economy's initial aggregate demand curve (AD1) Suppose the government increases its purchases by $2 billion. After the multiplier effect, the increase in government purchases will cause the quantity of output demanded to decrease by $20 billion | at each price level $15 billiorn o show the agg $2 billion rve (AD2) after the Use the green line (triangle symbols) on the following graph to show the agg multiplier effect takes place. Be sure the new aggregate demand curve (AD2 slope of AD1 by mousing over it on the following graph $25 billion . You can see the $10 billiorn PRICE LEVEL 116 AD2 112 AD3 108 104 AD1 100 100 110 120 130 140 QUANTITY OF OUTPUT (Billions of dollars Help Clear All

Explanation / Answer

increase in government spending will cause the quantity of output demanded to increase by $20 billion.

As a result of increase in the government spending, demand curve will shift ti right.

.....interst rate in the money market to increase from 3%

the increase in the interest rate will reduce the investment spending

......crowding out

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