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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 (AD1).
Suppose the government increases its purchases by $3.5 billion.

Respuesta :

The total change in demand resulting from the initial change in government spending is $2.1

How to Interpret Aggregate Demand Curve?

Formula for Marginal propensity to consume is;

MPC = Change in Consumption/Change in Income = 0.5/1

MPC = $0.5

Formula for Spending Multiplier = 1/(1 - MPC)

Spending multiplier = 1/(1 - 0.5) = 2

The marginal propensity to consume for this economy is $0.50, and the spending multiplier is $2.

Suppose the government decides to increase government purchases by $3.5 billion. As there is an increase in government purchases, there will be an increase in income.

An initial change in consumption is equal to $3.5 * 0.60 = $2.1

An increase in income again causes a second change in consumption equal to $2.1 * 0.50 = $1.05

Change in demand = Government purchases × multiplier

Change in demand = $2.1 * 2 = $4.2

Read more about Aggregate Demand Curve at; https://brainly.com/question/1490249

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