Question

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

A. increases

B. decreases

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

A. planned aggregate expenditure

B. planned aggregate output

c) 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):

A. ₹2 850 000

B. ₹3 000 000

C. ₹3 150 000

D. ₹60 000 000

d) 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 _______.

A. $3 500 000; $3 000 000

B. $3 000 000; $2 500 000

Answer 1

a)When the interest rate on newly issued bonds increases, the price of existing bonds: decreases.

b) An increase in taxes or a cut in transfers tends to lower planned aggregate output.

c)

Firstly, Money Multiplier = 1 / Reserve Ratio.

Finally,to calculate the maximum change in the money supply, use the formula

Change in Money Supply = Change in Reserves * Money Multiplier.

20*3 000 000=60,000,000

the money supply in Tatooine equals 60,000,000

d)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 3 000 000 and planned investment equals 250000