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

Question

Refer to the table for Moola given below to answer the following questions What is the equilibrium interest rate in Moola? % What is the level of investment at the equilibrium interest rate? $ 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? of $ There is a (Click to select) billion. Given money demand, by how much would the Moola central bank need to change the money supply in order to close the output gap?

Explanation / Answer

1) Equilibrium interest rate is where Md = Ms or 500 = 500 at r = 7%.

2) Investment at 7% rate of interest is $50

3) At an interest rate of 7%, actual GDP is $330 which falls short of its potential level of $350. So there is deflationary gap of $20 billion

4) Actual Real GDP should reach its potential level, that is, $350 billion. This means to have a GDP level of $350 billion, an interest rate of 6% is needed at which Md is $600. So money supply should be increased by $100 billion.

5) To increase the GDP by 20, money supply is needed to be increased by 100. Hence the multiplier is 0.2

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