Question

# Refer to the table for Moola given below to answer the following questions. Money Supply Money...

Refer to the table for Moola given below to answer the following questions.

 Money Supply Money Demand Interest Rate Investment at Interest (Rate Shown) Potential Real GDP Actual Real GDP at Interest (Rate Shown) \$500 \$800 3% \$70 \$350 \$390 500 700 4% \$60 350 370 500 600 5% \$50 350 350 500 500 6% \$40 350 330 500 400 7% \$30 350 310

a. What is the equilibrium interest rate in Moola?

b. What is the level of investment at the equilibrium interest rate?

c. Is there either a recessionary output gap (negative GDP gap) or an inflationary output gap (positive GDP gap) at the equilibrium interest rate and, if either, what is the amount?

d. Given money demand, by how much would the Moola central bank need to change the money supply to close the output gap?

e. What is the expenditure multiplier in Moola?

(a)

In money market equilibrium, Money demand = Money supply = 500.

Corresponding interest rate = 6%

(b)

When r = 6%, Investment = \$40

(c)

When r = 6%, Potential GDP > Actual GDP, so there is a Recessionary gap.

Recessionary gap = 350 - 330 = 20

(d)

Potential GDP = Actual GDP = 350 when r = 5%, Money demand = 600 and Money supply = 500.

To close output gap, Money supply should be increased by (600 - 500) = 100.

(e)

When r = 6%, Investment = 40 and When r = 5%, Investment = 50

Multiplier = Increase in real GDP / Increase in investment = (350 - 330) / (50 - 40) = 20/10 = 2

#### Earn Coins

Coins can be redeemed for fabulous gifts.