Question

1. Assumethatinvestmentexpenditures(I)increasebyamultipleof20dollarsforeach1 percentage point decrease in Kappa’s only rate of interest (i).

2. Kappa’ssimple(noinflation)GDPmultiplieris5.

3. Kappa’smoneymultiplier(nocurrencydrainage)is5.

4. WhenKappa’smoneysupplychangesby$10,therateofinterest(i)changesby1

   percentage point.

26. What change in investment expenditures (I) is required to bridge Kappa’s current recessionary gap of $200?

    a) an increase of $30 b) a decrease of $30 c) an increase of $40 d) a decrease of $40.

27. What change in the rate of interest (i) is required to generate the change in investment expenditures in question 26?
    a) an increase of 2 percentage points b) a decrease of 2 percentage points c) an increase of 4 percentage points d) a decrease of 4 percentage points.

28. What change in the money supply is required to generate the change in the rate of interest in question 27?

    a) an increase of $20 b) a decrease of $20 c) an increase of $30 d) a decrease of $30.

Answer 1

Recessionary Gap= $200

Tu fill this recessionary Gap, income should be increased by $ 200 dollars which require Investment expenditure to increase.

Increase in income = GDP multiplier × Increase in investment

200= 5 × increase in investment

Increase in investment= $40

Option c is correct.

If rate of interest goes by 1 %, investment expenditure go up by $20.

To increase investment Expenditure by $40, a 2% decrease in interest rate is needed.

Option b is correct.

When money supply changes by $10, interest rate changes by 1%.

So it means If money supply increases by $10, interest rate declines by 2%.

But our requirement is to make interest rate fall by 2%, for which money supply has to be increased by $20.

Option a is correct.