Question

a) Madrigal Electromotive expects to sell $5 000 000 worth of HEPA air filters and large industrial equipment and to produce $6 250 000 worth of HEPA air filters and large industrial equipment in the coming year. The company purchases $3 000 000 of new equipment during the year. Sales for the year turn out to be $4 500 000. Actual investment by Madrigal Electromotive equals _____ and planned investment equals _______.

b) In Tatooine, all ₹3 000 000 in currency is held by banks as reserves. The public does not hold any currency. If the banks' desired reserve–deposit ratio is 5%, the money supply in Tatooine equals (₹ is the symbol for the currency in Tatooine):__________.

c) An increase in taxes or a cut in transfers tends to lower:

A. the government's budget

B. the government's planned tax inflow

C. planned aggregate expenditure

D. planned aggregate output

d) When the interest rate on newly issued bonds increases, the price of existing bonds:

A. increases

B. decreases

C. increases only if the coupon rate is below the new rate

D. may either increase or decrease

Answer 1

a) Actual investment is $4500000-$3000000=$1500000

Planned nvestment is$6250000-$5000000=$1250000

b) Since thepublic does not hold any currency,

Money multiplier=Money supply/Monetary base=1/r

Therefore money supply=3000000/.05=60000000

c) C. planned aggregate expenditure

government budget will increase as taxes increase and so net expenditure decreases. So, governemnt planned budget inflow will also increase. Effect on planned aggregate output depends on other factrors too.

d) B. decreases

This is because there is an inverse relationship between the price of a bond and its yield. Higher the yield lower will be the price and hence all other options are not True.