LLLLLLIOints ) 26Country XYZ given belowthe questions . Refer to table for the .

Question

LLLLLLIOints ) 26Country XYZ given belowthe questions . Refer to table for the . Answer listed below the table. Make sure to explain. Money Supply Money Demand Interest $300 $950 Actual Investment Potential Real GDP (at Interest Rate Real GDP (at Interest Shown) Rate Shown) $60 $300 $390 300 700 S003 300 300 300 300 150 300 100 100 300 200 300 a. What is the equilibrium interest rate in Country XYZ? 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? d. If you answered yes to part c) above, what is the amount? e. Given money demand, by how much would the Country XYZ's Central Bank need to change the money supply to close the output gap? Page 7 of 9

Explanation / Answer

Multiple questions asked.

Q1 is answered below.

a)

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

Looking at the data, this occurs when interest rate = 5%

(Here money dd = money ss = $300)

b)

Looking at the data, the level of investment at i=3% is $30

c)

At i=5%, potential real GDP exceeds actual real GDP, which makes the output gap recessionary

d)

Amount of recessionary gap = Potential real GDP – Actual real GDP = $300-$100 = $200

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