Aggregate Demand II - End of Chapter Problem @ Macmillan Learning Use the /S-LM model to predict the short-run effects of each of the following shocks on income, the interest rate, consumption, and investment. In each case, explain what the Fed should do to keep income at its initial level. For each of these shocks, (1) shift the appropriate curve in the /S-LM graph to reflect how the economy will respond to the shock; (2) indicate the impact of the shock on consumption, income, the interest rate, and investment by placing each in the appropriate category of "increase" or "decrease"; and (3) identify the Fed's proper policy response to maintain income at its initial level. a. After the invention of a new high speed computer chip, many firms decide to upgrade their computer systems. Firms Upgrade Computer Systems 10 IM Interest Rate (in *) 14 18@ Macmillan Learning Increase Decrease Answer Bank consumption income investment interest rate To maintain income (1), the Fed should the money supply. b. A wave of credit card fraud increases the frequency with which people make transactions in cash. Cash Transactions Increaseb. A wave of credit card fraud increases the frequency with which people make transactions in cash. @ Macmillan Learning Cash Transactions Increase 10 ID LM Interest Rate (in $) IS 2 4 6 10 14 16 20 Income (in billions of $) Increase DecreaseE Macmillan anrn:n_ E To maintain income (), the Fed should . | the money supply. . A best seller titled Retire Rich convinces the public to increase the percentage of its income devoted Lo saving. People Autonomously Increase Saving N - 10 ID IM @ Macmillan Learning Interest Rate (in *) X 2 4 6 8 10 12 14 16 18 20 Income (in billions of $) Increase Decrease Answer Bank0 2 4 10 12 14 16 18 20 Income (in billions of $) Increase Decrease Answer Bank investment interest rate consumption income To maintain income (1), the Fed should the money supply