Assume that the following data characterize a hypothetical economy of Greatcy: m

Question

Assume that the following data characterize a hypothetical economy of Greatcy: money supply money demanded for transactions = $200 billion; quantity of money demanded as an asset-S2 interest, increasing by $30 billion for each 1-percentage-point fall in the interest rate $280 billion; quantity of sset $20 billion at 6 percent 1. Present the data graphically using the space provided on the left. Properly label the grap 2. What is the equilibrium interest rate in Greatcy? 3. At the equilibrium interest rate, what are the quantity of money supplied, the total quantity of money demanded, the amount of money demanded for transactions, and the amount of money demanded as an asset in Greatcy? Quantity of money (M) supplied Sm S Total quantity of money (M) demanded Dm $ Amount of M demanded for transactions D- Amount of M demanded as an asset D, $ Refer to the table below for a snapshot of Kinpo's economy (all numbers are in billions) Investment (I) at Potential Real Actual Real GDP at GDP Current Money Money Demand Interest Rate $80 70 60 50 40 Interest Rate $980 960 940 920 900 Supplied Money Demanded Interest Rate -ST,100 $960 $700 S700 S700 $700 5700 3% 900 $700 $500 $300 960 960 960 6% 4. Answer the following questions What is the equilibrium interest rate in Kinpo:? What is the level of investment (l) at the equilibrium interest rate? 5. Is there a recessionary output gap (negative GDP gap), an inflationary output gap (positive GDP g3p) or there is no gap at the ongoing equilibrium interest rate? Tne veisetue C 6. If there is a gap, what is the amount of it (use negative sign for the recessionary gap)? 2 k need to increase or decrease money supply to close 7. Given money demand, does the Kinpo's central ban the output gap (if one exists)? 8. By how much (use negative sign to show decrease in money supply)? What will be the new interest rate in Kinpo? What is the size of investment spending (lg) under this new interest rate? at is the GDP multiplier in Kinpo? (Hint: think of how much I,changed in response to the interest rate change and compare it with change in real GDP.)

Explanation / Answer

1)

i Money supply MD for transaction MD for Asstes Total MD 6 280 200 20 220 5 280 200 50 250 4 280 200 80 280 3 280 200 110 310 2 280 200 140 340 1 280 200 170 370 0 280 200 200 400 2) Equilibrium is where Total Money Demand equals total money supply. this is at MS= total MD = 280 at i* = 4% 3) Money supply(Sm) = $280 Dm = $280 Dt = $200 Da = $80 7) increase money supply because actual GDP<potential GDP. 8) $200, given demand is at $700. new interest rate where actual GDP = Potential GDP is i**= 3% Ig = $70 multiplier(m) = change in Y/change in Ig m= 20/10 = m=2

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.