Question

Efer to the table for Moola below to answer the following questions.

Money Supply Money Demand Interest Rate Investment at Interest (Rate Shown) Potential Real GDP Actual Real GDP at Interest (Rate Shown)
$ 500 $ 800 2% $50 $ 350 $ 390
500 700 3 40 350 370
500 600 4 30 350 350
500 500 5 20 350 330
500 400 6 10 350 310
What is the equilibrium interest rate in Moola?
percent
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? $
Given money demand, by how much would the Moola central bank need to change the money supply to close the output gap?
$ increase
What is the expenditure multiplier in Moola?

Answer 1

The equilibrium interest rate in Moola is 4%. Investment at this rate is $30. There is no output gap. To close a potential gap of $30, the central bank must increase the money supply. The expenditure multiplier is approximately 0.67.

To determine the equilibrium interest rate in Moola, we look for the point where money supply equals money demand. In the given table, the equilibrium occurs when Money Supply equals Money Demand. Let's find that point:

`\[ Money\ Supply = Money\ Demand \]`

At the equilibrium:

500 = 600

So, the equilibrium interest rate is 4%.

The level of investment at the equilibrium interest rate is $30.

To check for an output gap, we compare the Potential Real GDP with the Actual Real GDP at the equilibrium interest rate:

`\[ Potential\ Real\ GDP - Actual\ Real\ GDP = 350 - 350 = 0 \]`

There is neither a recessionary nor an inflationary output gap at the equilibrium interest rate.

To close the output gap, the Moola central bank would need to increase the money supply by $30.

The expenditure multiplier in Moola is calculated as the reciprocal of the marginal propensity to consume (MPC). In this case, the MPC is given by the change in investment divided by the change in real GDP:

`\[ \text{Expenditure Multiplier} = \frac{1}{\text{MPC}} \]\[ \text{MPC} = \frac{\text{Change in Investment}}{\text{Change in Real GDP}} = (30)/(20) = 1.5 \]`

So, the expenditure multiplier in Moola is
`\( (1)/(1.5) \)` or approximately 0.67.