Chapter 16: Monetary Policy (page 321)
What are the components affected in a contractionary monetary policy?
C, I, (X-M)
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Refer to the table for Moola 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? Given money demand, by how much would the Moola central bank need to change the money supply to close the output gap? What is the expenditure multiplier in Moola?
Money Supply (\() | Money Demand (\)) | Interest Rate (%) | Investment at Interest Rate Shown (\() | Potential Real GDP (\)) | Actual Real GDP at Interest (Rate Shown) ($) |
500 500 500 500 500 | 800 700 600 500 400 | 2 3 4 5 6 | 50 40 30 20 10 | 350 350 350 350 350 | 390 370 350 330 310 |
A bank currently has \(100,000 in checkable deposits and \)15,000 in actual reserves. If the reserve ratio is 20 percent, the bank has ______ in money-creating potential. If the reserve ratio is 14 percent, the bank has _______ in money-creating potential
a. \(20,000; \)14,000
b. \(3,000; \)2,100
c. −\(5,000; \)1,000
d. \(5,000; \)1,000
Explain the links between changes in the nation's money supply, the interest rate, investment spending, aggregate demand, real GDP, and the price level.
What is the basic determinant of (a) the transactions demand and (b) the asset demand for money? Explain how to combine these two demands graphically to determine total money demand. How is the equilibrium interest rate in the money market determined? Use a graph to show how an increase in the total demand for money affects the equilibrium interest rate (no change in the money supply). Use your general knowledge of equilibrium prices to explain why the previous interest rate is no longer sustainable.
Who are the MPC?
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