3 1 The graph below illustrates the money demand and investment demand for the economies of Pabst and Kokanee. Pabst Kokanee a. If money supply is increased by 25, what will be the new interest rate? Round your answers to one decimal place. Pabst: % Kokanee: % b. What will be the increase in investment spending as a result of this new interest rate? Pabst: Kokanee: c. If the multiplier is 2 in each economy, what will be the increase in GDP? Pabst: Kokanee: d. In which economy would monetary policy be more effective in closing a recessionary gap? PabstKokanee 10 (110.1.5) 70 80 90 100 110 120 Quantity of money 70 80 90 100 110 120 130 Quantity of money MD MS 圈圈 MD MS Kokanee Interest rate 10 8 2 6 5 4 3 2 Interest rate 1 6 S 4 3 2 10 20 30 40 50 60 70 80 90 100 Quantity of investment 10 20 30 40 50 60 70 80 90 100 Quantity of investment E E

3 1 The graph below illustrates the money demand and investment demand for the economies of Pabst and Kokanee. Pabst Kokanee a. If money supply is increased by 25, what will be the new interest rate? Round your answers to one decimal place. Pabst: % Kokanee: % b. What will be the increase in investment spending as a result of this new interest rate? Pabst: Kokanee: c. If the multiplier is 2 in each economy, what will be the increase in GDP? Pabst: Kokanee: d. In which economy would monetary policy be more effective in closing a recessionary gap? PabstKokanee 10 (110.1.5) 70 80 90 100 110 120 Quantity of money 70 80 90 100 110 120 130 Quantity of money MD MS 圈圈 MD MS Kokanee Interest rate 10 8 2 6 5 4 3 2 Interest rate 1 6 S 4 3 2 10 20 30 40 50 60 70 80 90 100 Quantity of investment 10 20 30 40 50 60 70 80 90 100 Quantity of investment E E

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Interest rate
3
The graph below illustrates the money demand and investment demand for the economies of Pabst and Kokanee. Pabst
Kokanee a. If money supply is increased by 25, what will be the new interest rate? Round your answers to one decimal
place. Pabst: % Kokanee: % b. What will be the increase in investment spending as a result of this new interest rate?
Pabst: Kokanee: c. If the multiplier is 2 in each economy, what will be the increase in GDP? Pabst: Kokanee: d. In which
economy would monetary policy be more effective in closing a recessionary gap? PabstKokanee
3
2
1
10
9
8
MD
MS
33
Interest rate
2
1
7
6
(110,1.5)
0
70
80
90 100
110
120
10 20 30 40 50 60 70 80 90 100
Quantity of money
Quantity of investment
MS
MD
Kokanee
Interest rate
3
10
9
8
2
1
70
90 100 110
120 130
0
Quantity of money
10 20 30 40 50 60 70 80 90 100
Quantity of investment

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Step 2: a. Calculate new interest rates of the two economies.

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Step 4: c. Calculate increase in GDP in each economy.

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4. Suppose gross saving in the United States is 20 percent of Gross National Product (GNP). a. If business saving is 15 percent of GNP and government saving is 4 percent of GNP, what percent of GNP is personal saving?b. Explain why a federal budget surplus increases national saving while a budget deficit decreases national saving.c. How can a federal budget deficit increase market equilibrium interest rates and reduce private investment and future economic growth?
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a. The following plot shows the 12-month percentage growth rates in real personal consumption expenditures (blue line) and in real government expenditures (red line). Do you see any evidence that the latter crowds out the former? Why or why not? 20 15 10 5 -10 -15 15 10 5 0 -5 -10 The following plot shows the 12-month percentage growth rates in real GDP (blue line) and in real government expenditures (red line). What, if any, relationship does there appear to be between these two time series? Briefly explain. Rate of Growth of C (blue) and G (red) 2003 3005 2007 2003 2013 2015 2017 2019 Rate of Growth of Y (blue) and G (red) 2011 2009 2007 2005 2013 2015 2021 2017 2023 2019 2021 2023