(b) (5 Marks) The following figure illustrates the money demand and investment d
ID: 2441112 • Letter: #
Question
(b) (5 Marks) The following figure illustrates the money demand and investment demand for the economies of Argos and Spartak (subscipted A and s) 14 12 10 16 14 12 10 0 80 240 320 400 Quantity of money 0 20 460 100 Quantity of investment a) b) c) If the money supply is increased by $80 in both economies, what will be the new interest rate in Argus and in Spartak? What will be the increase in investment spending as a result of this new interest rate? In which country is monetary policy more effective?Explanation / Answer
a) If money supply is increased by $80 in both economies, then new interest rate for Argus will be 6 percent and for Spartak the new interest rate will be 5%.
b) As a result of decline in interest rate in Argus from 7 percent to 6 percent the demand for investment in Argus will increase to 55. Therefore it will increase by 5 i.e from 50 to 55. In Spartak the invest demand will increase to 90. Therefore it will increase by 40 i.e from 50 to 90.
c) Monetary policy is more effective in Spartak because here investment is more interest sensitive than Argus. In Spartak investment more increases due to fall in interest rate. The interest rate also fall more in Spartak due to increase in money supply.
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