Question 10. In the nation of Westeros, the money demand curve shifts to the rig

Question

Question 10. In the nation of Westeros, the money demand curve shifts to the right and changes equilibrium interest rates. If Federal Reserve Chairman Tyrion original equilibrium value, he could: a. Buy bonds to increase the money supply b. Buy bonds to decrease the money supply c. Sell bonds to increase the money supply d. Sell bonds to decrease the money supply desired to return the real interest rate to its Question 11 If a $1,000 increase in consumer's income leads to a S600 increase in consumption expenditures, then: a. The marginal propensity to consume equals 0.4 and the multiplier equals 25 b. The marginal propensity to consume equals 0.6 and the multiplier equals 2.5 c. The marginal propensity to consume equals 0.4 and the multiplier equals 1.66 d. The marginal propensity to consume equals 0.6 and the multiplier equals 1.66. Question 12. Suppose that the multiplier effect-a function of the marginal propensity to consume results in a multiplier greater than 1. If there are no crowding-out or investment accelerator effects, which of the following actions would shift the aggregate-demand curve to the right by more than the initial amount? a. An increase in government expenditures. b. An increase in net exports. c. An increase in investment spending. d. All of the above.

Explanation / Answer

10. a) Buy bonds to increase the money supply.

When the Fed increases money supply then it shifts Money supply curve leftwards which reduces market interest rate.

11. MPC = Change in consumption expenditure/Change in income = 600/1000 = 0.6

Multiplier = 1/(1 - MPC) = 1/(1 - 0.6) = 1/0.4 = 2.5

b) The marginal propensity to consume is 0.6 and the multiplier equals 2.5

12. d) All of the above.

Increase in Government spending, net exports and investment spending shifts AD curve rightwards.

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