Use the diagrams below to answer the following questions. Figure 27-5Interest RatePrice Level5%4%2%1%105102100500540754 800 806MMoQuantity of Money(5)ADIADReal GDP(Shillo) 794 800 806Real GDP(S billions)Refer to Figure 27-5. This economy begins in equilibrium with Ms0, Mp0 and real GDP equal to potentialGDP (with ADO and ASO). Now suppose there is an increase in the money supply to $540 billion. After theinitial effect on the interest rate, the next response in this economy is as follows:a)the higher interest rate causes wages and other factor prices to rise, which causes the AS curve toshift to AS1. Real GDP falls to $795 billion and the price level rises to 102.b)the lower interest rate stimulates investment demand, which causes the AD curve to shift to AD1.Real GDP rises to $806 billion and the price level rises to 102.c)the lower interest rate stimulates investment demand, which causes the AD curve to shift to AD1.Real GDP rises to $805 billion and the price level rises to 102.d)the lower interest rate causes wages and other factor prices to rise, which causes the AS curve toshift to AS1. Real GDP falls to $795 billion and the price level rises to 102.e)the lower interest rate stimules an increase in the demand for money, which causes the MD curveto shift to MD1. The interest rate rises to 3%,

The money market is a financial market where short-term financial instruments such as treasury…

Answered: Use the diagrams below to answer the…

Use the diagrams below to answer the following questions. Figure 27-5 Interest Rate Price Level * * * 5% 4% 2% 1% 105 102 100 140 754 800 306 M Mo Mp Quantity of Money (5) ADI AD Real GDP (5)

ENGR.ECONOMIC ANALYSIS

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Chapter1: Making Economics Decisions

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Question

794 800 806
Real GDP
(S billions)
Refer to Figure 27-5. This economy begins in equilibrium with Ms0, Mp0 and real GDP equal to potential
GDP (with ADO and ASO). Now suppose there is an increase in the money supply to $540 billion. After the
initial effect on the interest rate, the next response in this economy is as follows:
a)
the higher interest rate causes wages and other factor prices to rise, which causes the AS curve to
shift to AS1. Real GDP falls to $795 billion and the price level rises to 102.
b)
the lower interest rate stimulates investment demand, which causes the AD curve to shift to AD1.
Real GDP rises to $806 billion and the price level rises to 102.
c)
the lower interest rate stimulates investment demand, which causes the AD curve to shift to AD1.
Real GDP rises to $805 billion and the price level rises to 102.
d)
the lower interest rate causes wages and other factor prices to rise, which causes the AS curve to
shift to AS1. Real GDP falls to $795 billion and the price level rises to 102.
e)
the lower interest rate stimules an increase in the demand for money, which causes the MD curve
to shift to MD1. The interest rate rises to 3%,

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