The following graphs outline the economy of the United States. The general price level is constant.
The following graphs outline the economy of the United States. The general price level is constant.
a) In the following graph plot the new MS line that corresponds to a decrease in the money supply that would increase the interest rate from 5% to 7%
b) Plot the new equilibrium point on the la line that shows the effect of the higher 7% interest rate on the level of investment spending
c) With the new interest rate what is the new level of investment spending?
Investment spending = $0
d) Plot the new AD line that shows the effect on real GDP for the case where for every $1.00 change in investment the aggregate demand changes by $4.00.
Homework Answers
The MD has an inverse relatioship between quantity of money , and the equilibirum will move along the MD curve when MS shifts left.
The investment decreased from 450 to 400, that is a decrease of $50
Thus a $50 decrease i ivestment will decrease AD by 50x4=$200
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