Question 7 Refer to the table for Moola given below to answer the following ques

Question

Question 7

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

Instructions: Enter your answers as whole numbers.

a. What is the equilibrium interest rate in Moola? __________percent.

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

c. 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?

     (Click to select)Recessionary output gap/ Inflationary output gap of $__________.

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

     (Click to select) Increase/ Decrease the money supply by $__________.

e. What is the (expenditure) multiplier in Moola?__________ .

Explanation / Answer

Equilibrium occurs at the point where money demand equals money supply.

In the given question, equilibrium point: Md = Ms = 500

a)

Interest rate corresponding to the equilibrium point = 5%

b)

Investment level corresponding to the equilibrium point = $20

c)

Sine at the equilibrium, potential real GDP is more than the actual real GDP, it means that there is recessionary output gap.

Amount of gap = $150-$330 = $20

d)

Increase the money supply

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