Question

S. How will the following events affect the demand for money? For each case, draw an original money demand curve and then draw the change. Label carefully. a. There is atal in the interest rate bom 125 to 10 b. Thanksgving arives and, with It, the beginning of the holiday shopping season c. McDonald's, Dunkin Donuts and other last food restaurants begin to accept credit cards 6. An economy is tacing a recessionary gap. Draw the graph to show the gap and the change when policy is implemented. To eliminate the gap, the legislature and executive budget should use l contractionary or ex fiscal policy. As the gap closes, the following variables will (Iincrease or decrease?y Conuumer spending The aggregate price level Assume the SRAS is horisontal. For each cane, identily the unput Go which eists and calulate its sie: Real GOP-Potential GDP. Then calculate the multiplier fer &G Then calculate to cose the gap with a Real GDP $200 B, Potential GOP Y -5320, MPC 75 b. Real GOP $125 B, Potential GDP $300 & MPC 0.5 c. Real GCP·Son, Potential GDP Ye-S2000, wc . 08. 8. How would the following events affect the current public debt and implicit liabilities of the US govenment a Medicare Part D, enacted in 2008, affers seniors a prencrigtion dieg benefa b. The retirement age for full Social Security benefits is raised to 70 years old c Social Security benelits for fature retirees are limited to those seniors with low incomes d Becaune the cost of health care is increasing faster than the overall inflation rate, annual inc reases in Social Security benefits are increased by the antrual increase in health care costs rather than the overal 9. For each transaction, what is the eflect lincrease, decrease, no chang7) on both M1 and M2 You sell a few shares of stock and depeit the proceeds in your savings account proceeds in your checking wccount You tr ander mom hom yoursavingatoent to your cheing account. You discover 51 under the couch and depoit it in your checking account. 10 Describe open market operations (aj to increase the money supply, and (hi to decreanes 11 What ane the three components of economic Investment spending? FOR 20 POINTSy economic

Answer 1

"a. A fall interest rate raises the money demand because a person would now rather hoe the money than invest in bonds, because they now offer lower return b. Money demand increases due to the ""transaction demand"" component of money demand rising for all the shopping c. Usage of credit equals the demand for money as credit card provide intersect free loan from the bank due to which people do not want to hold cash. \r\n To close the recessionary gap, expansionary fiscal policy should be implemented. As we can see from thus graph of ""fiscal policy in neo - classical model"" intersect rate increases investment spending decreases (because it is an inverse function of invert rate) consumer spending increases as aggregate demand rises real G D P may increases or decrease (depends in flow such is the increase in price level) price level increases"