Question

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

Instructions: Enter your answers as whole numbers.

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?

  

Answer 1

(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