Refer to the graphs below, in which t nvestment spending (l,) associated with ea
ID: 1123758 • Letter: R
Question
Refer to the graphs below, in which t nvestment spending (l,) associated with each curve. All figures are in billions. he numbers in parentheses near the AD, through ADs labels indicate the levels of MS MS2 MS MS MS, MS 12 10 Investment 10 $100 125 10 175 200 22s $S0 60 70 80 90 100 Amount of Money Demanded and Supplied Investment (l AS Ds 2 $100) D1-$90) AD, (,-$80) AD, (, -$70) AD2 (Ig-S60) AD, ( $50) Q Real GDP Answer the following questions: 9. What is the desired level of investment spending (l) in this economy at the full-employment level of real GDP (Q)? At what interest rate such an investment happens? If, currently, the investments are at $60 billion and the aggregate demand curve is AD2 what change in interest rate should help restoring the full-employment level of real GDP (Qf)? Change in interest rate should be from To attain the desired interest rate and achieve the full-employment level of real GDP (Q:), what policy should the central bank pursue? Change money supply fronm 10. To shift the aggregate demand curve from AD2 to the desired level what action the central bank needs to employ: buy gov-t securities on the open market, sell gov-t securities on the open market, do both or do nothing? 11. What if the Fed increased Sm to M56 and interest rates fell to 2%; how much are businesses' investments now? to to The government is now concerned with rising inflation; in presence of the ratchet effect, what change in the interest rate should help restoring the full-employment level of real GDP (Qf)? Change in interest rate from To attain the desired interest rate and achieve the full-employment level of real GDP (Q), what policy should the central bank pursue? Change money supply from 12. To shift the aggregate demand curve from AD6 to the desired level what action the central bank needs to employ: buy gov-t securities on the open market, sell gov-t securities on the open market, do both or do nothing? 13. If the aggregate demand is moved by government from AD6 to AD4 and assuming the ratchet effect, what is the overall result of the action: inflationary pressures remain (prices keep rising), full employment level of real GDP (Of) is the economy is in recession? to to achieved,Explanation / Answer
(9)
(a) Full employment output (Qf) is achieved when AD4 intersects AS.
When relevant AD curve is AD4, Ig = $80 billion.
When Ig = $80 billion, Interest rate = 6% (At point D of investment schedule)
(b) When Ig = $60 billion, Interest rate = 10% & When Ig = $80 billion, Interest rate = 6% (From Investment schedule)
Change in Interest rate should be from 10% to 6%.
(c) When interest rate = 10%, Money supply = $125 billion (MS2 curve) and When interest rate = 6%, Money supply = $175 billion (MS4 curve)
Change money supply from $125 billion to $175 billion.
(10) Buy government securities.
To move from AD2 to AD4, aggregate demand has to be increased by expansionary monetary poliy which includes open market purchase of government securities.
NOTE: As per Chegg answering guideline, first 2 questions are answered.
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