Question

Below is some data concerning the money market. Rate of Interest Asset Demand for Money $75 5% National income $740 720 700 680 660 6% 65 7% 8% 35. Refer to the information above to answer this question. If the transactions demand for money is 10 percent of national income and the supply of money is $135 then what would be the equilibrium interest rate? A) 4%. B) 5%. C) 6%. D) 7%. E) 8%. 36. Refer to the information above to answer this question. If equilibrium national income is S680, the transaction demand for money is 10 percent of national income and the equilibrium interest rate is 7 percent then what is the supply of money? A) S149. B) $142. C) $135. D) $128. E) $121. 37. Explain how a decrease in the price level affects the aggregate quantity demanded. A) It causes an increase in the interest rate and a decrease in investment spending. B) It causes an increase in the interest rate and an increase in investment spending. C) It causes a decrease in the interest rate and a decrease in investment spending. D) It causes a decrease in the interest rate and an increase in investment spending. E) It causes a decrease in the interest rate and an increase in savings. 38. What does the Keynesian transmission process involve? A) Money demand, the exchange rate, investment and GDP. B) Money supply, the interest rate, investment and GDP. C) The interest rate, GDP and the asset demand for money. D) Only the interest rate and GDP. E) Only the level of investment and GDP. 39. What will an increase in the money supply tend to do? A) Increase interest rates and lower the equilibrium GDP B) Increase interest rates and increase the equilibrium GDP. C) Lower interest rates and increase the equilibrium GDP. D) Lower interest rates and lower the equilibrium GDP. E) None of the above.

Answer 1

(35) (C)

When r = 6%,

Transaction demand = 700 x 10% = 70

Total money demand = Asset demand + Transaction demand = 65 + 70 = 135 = Money supply

(36) (D)

Transaction demand = 680 x 10% = 68

Asset demand (when r = 7%) = 60

Total money demand = 68 + 60 = 128 = Money supply

(37) (D)

lower price level reduces interest rate, which increases investment and raises aggregate quantity demanded.

(38) (B)

Increase (decrease) in money supply will decrease (increase) interest rate, which increases (decreases) investment and AD.

(39) (C)

Increase in money supply increases AD, shifting AD curve rightward and increasing GDP.