Principles of Fall 2017 Exhibit 2 Money Demand and Supply, investment and Real G

Question

Principles of Fall 2017 Exhibit 2 Money Demand and Supply, investment and Real GDP rate Interest Price MS, MS AD AD -1 MD Investment Panel B Panel A Panel C 3. In Exhibit 2, if the interest rate falls from i to i, then: a the quantity demanded of investment increases from l, to l, and investment spending b. the quantity demanded of investmen c. the quantity demanded of investment decreases from l2 to Ii and investment spending aggregate demand curve from AD2 to AD, decreasing the level of real GDP t increases from Ii to 12 and investment spending the aggregate demand curve from AD, to AD,, increasing the level of real GDP shifts the d. th e aggregate demand curve from AD, to AD2, decreasing the level of real GDP equantity demanded of investment decreases from l2 to li and investment spending shifts the aggregate demand curve from AD2 to AD, increasing the level of real GDP the quantity demanded of investment stays the same causing the aggregate demand curve to shift from AD2 to AD, decreasing the level of real GDP. e. 4. In Exhibit 2, if the Central Bank believes the economy is at AD, how might it engineer a decline in the price level? a. By decreasing the money supply, the interest rate falls, investment rises, and aggregate b. By decreasing the money supply, the interest rate rises, investment rises, and aggregate c. By decreasing the money supply, the interest rate rises, investment falls, and aggregate d. By increasing the money supply, the interest rate rises, investment rises, and aggregate e. By increasing the money supply, the interest rate rises, investment falls, and aggregate demand falls, causing the price level to fall. demand rises, causing the price level to fall. demand falls, causing the price level to fall. demand falls, causing the price level to fall. demand rises, causing the price level to fall.

Explanation / Answer

3. The correct answer is: b)

Reason: It is clearly evident from panel B that when the interest rate falls, the investment increases from I1 to I2 and as a result in panel C, AD shifts and GDP rises.

4. The correct answer is: c)

Reason: By decreasing the money supply, the interest rate in the economy rises. As a result, the cost of investment riSes and investment falls thereby reducing AD and price level

Thanks!

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