Refer to the table for Moola given below to answer the following questions What
ID: 1202445 • Letter: R
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