Figure 4-7

-Using the information contained in Figure 4-7 above,the initial equilibrium Y is 3500.If there is 500 of new fiscal stimulus and a constant money supply,Y will increase to ________ and the interest rate will ________.
A)4000;remain constant
B)4000;rise to 10%
C)4500;rise to 12.5%
D)5500;remain constant

Question

Figure 4-7
 
-Using the information contained in Figure 4-7 above,the initial equilibrium Y is 3500.If there is 500 of new fiscal stimulus and a constant money supply,Y will increase to ________ and the interest rate will ________.
A)4000;remain constant 
B)4000;rise to 10% 
C)4500;rise to 12.5% 
D)5500;remain constant

Quizplus · Accepted Answer

According to the graph, an increase in fiscal stimulus will shift the aggregate demand curve to the right, resulting in an increase in both output (Y) and price level (P). However, since the money supply is constant, the increase in output will cause an increase in interest rates. The new equilibrium (Y*) will occur where the aggregate demand curve intersects the short-run aggregate supply curve at a higher price level. The increase in equilibrium output will be greater than the increase in fiscal stimulus due to the multiplier effect. Using the graph, we can estimate that Y* will be around 4500. Therefore, C is the best choice as it matches this estimate of Y* and explains the corresponding increase in interest rates.

Figure 4-7 -Using the Information Contained in Figure 4-7 Above,the Initial Equilibrium