mAns. Investment increase required to bring the economy back to full employment level = Recessionary gap / Spending multiplier
Here, Spending multiplier = 1/(1-MPC) = 1/(1-0.8) = 5
Thus, investment increase required = 100 billion /5 = $20 billion
At present the interest rate in the money market is 8% (where money demand and money supply curve interests). At 8% interest, the investment spending is $20 billion and required increase in investment spending is $20 billion. So, total investment must be $40 billion which occurs at 4% interest.
So, to decrease interest rate to 4%, the central bank must increase by $100 billion to $200 billion.
Thus, to fill the recessionary gap, the central bank must increase money supply by $100 billion.
* Please don’t forget to hit the thumbs up button, if you find the answer helpful.
Thank You
Investment demand and the market for money are shown in the graphs below. If the economy...
Draw two money market graphs ( money supply & money demand) that demonstrates how the Fed closes the inflationary gap, and also a recessionary gap.
5. (10 Marks) The money market for the economy of Charlton is depicted in the graph given below (all dollar figures are in billions): Interest rate 50 100 150 200 250 300 Quantity of money The investment demand curve is shown in the following figure. 250 50 100 150 200 Quantity of investment Suppose that the central bank of Charlton wishes to use contractionary monetary policy and decreases the money supply by $50 billion. a. Draw the new money supply...
The figures below show the dernand for money and the money market. Transactions demand for money Asset demand for money Rate of interest, i (percent) Rate of interest, i (percent) 0 0+30 60 90 120 150 180 210 210 270 Amount of money demanded (billions of dollars) 30 80 90 120 150 160 210 240 270 Amount of money demanded (billions of dollars) a) Plat the total demand for many (by polling al kast 2 points) and the equilibrium interest...
AD-AS and Phillip Curve Model, Money Market and Banking System Graphically illustrate an economy in the long run equilibrium, producing at the full employment level of production. Indicate the equilibrium Price level (P*) and the level of real GDP (Y*) Graphically illustrate an economy in the short run equilibrium producing at a below full employment level of production. Indicate the equilibrium Price level (P*) and the level of real GDP (Y*) and show the amount of the recessionary gap. Graphically...
The following graph shows the money market in a hypothetical economy. The money supply is currently $200 billion, so the equilibrium interest rate is 0.5%, as shown by the grey star labeled A. Money Supply 0.9 0.8 New MS 0.7 .+ 0.6 INTEREST RATE (Percent) 0.5 Money Demand 0.4 0.3 0.2 0.1 0 800 100 200 300 400 500 600 700 QUANTITY OF MONEY (Billions of dollars) True or False: According to the Keynesian view of the economy, this economy...
Aggregate Market Assignment 1. Update the graph below to show an increase in short run aggregate supply and show what effect this increase in Increase short run aggregate supply will have on price levels and real GDP. Price Tevel SRAS I AD Real GDP 2. Assume that a recessionary gap currently exists. If long-run supply (aka, potential output) increases and there is no change to aggregate demand or short run aggregate supply what happens to real GDP and to the...
Please box answers! Thank you. 11. Monetary policy and the LM curve Aa Aa The following graph shows the demand and supply of real money balances in a hypothetical economy. Use the black point (X point) to indicate the equilibrium in this market. Dashed drop lines will automatically extend to both axes. REAL INTEREST RATE [Percent) 10 Equilibrium Supply New Supply New Equilibrium Demand 3 0 10 20 30 40 50 60 70 80 90 100 REAL MONEY BALANCES Help...
10. Use the graph below to answer the following questions. Dr is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money Ss Sm2 St Dm D, 325 250 175 125 Quantity of money (a) What is the transactions demand for money in this market? (b) What is the asset demand for money if the interest rate is 4%? (c) If the money market is in equilibrium at 6%, describe the...
The aggregate investment demand curve is depicted in the graph below. Investment Demand Interest Rate (percent) 10% ☺ => 1 2 3 4 5 6 7 8 Investment (thousands of dollars) Suppose the real interest rate is 6%. Draw the investment schedule that shows the relationship between the level of real GDP and investment Instructions: Use the tool provided I to plot only the endpoints such that the first point touches the vertical axis. Aggregate Expenditures Aggregate Expenditures (dollars) 10,000...
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...