Question

Refer to the table for Moola given below to answer the following questions.

Money Supply	Money Demand	Interest Rate	Investment at Interest (Rate Shown)	Potential Real GDP	Actual Real GDP at Interest (Rate Shown)
$500	$800	2%	$50	$350	$390
500	700	3	40	350	370
500	600	4	30	350	350
500	500	5	20	350	330
500	400	6	10	350	310

What is the equilibrium interest rate in Moola? %

What is the level of investment at the equilibrium interest rate? $

Is there either a recessionary output gap (negative GDP gap) or an inflationary output gap (positive GDP gap) at the equilibrium interest rate and, if either, what is the amount?

There is a of $ billion.

Given money demand, by how much would the Moola central bank need to change the money supply in order to close the output gap?

the money supply by $

What is the (expenditure) multiplier in Moola?

Answer 1

Money supply is equal to money demand at 500 when the rate of interest is 5%. Therefore the equilibrium interest rate is 5%

Investment is 20 when the rate of interest is 5%

Potential real GDP is 350 but when the investment is 20 the real GDP is 330. Therefore we have a recessionary gap and it is worth 20.

Money supply should be increased by 100

Investment will increase by 10 when the equilibrium interest rate becomes 4% and real income is increased by 20 to reach 350 which is the potential GDP. Therefore multiplier in this economy is 20/10 equals 2.