Question 3 Interest rate 9 Dm IIdemand 70 120 170 100 200

Question 3 .. - Interest rate 9 ?? Dm IIdemand 70 120 170 100 200 300 Investment (S) Amount of money demanded and supplied (S) AS AD AD2 AD GDP, GDP2 GDP Real Domestic Output (a) (2 marks) Look at graph A and suppose the supply of money increases from 100 to 200. What will be the equilibrium rate of interest? (b) (2 marks) Look at graph B which shows an investment-demand curve for this economy. Given the answer to part (a) above, how much will investors plan to spend on capital goods? (b) (3 marks) Would you expect aggregate demand to increase by the change in capital goods spending... or more (explain)?

Solution

A. 6%

B. $120

C. aggregate demand will increase by a multiple of the increase in investment depending on the sizo of a multiplier.

D. 3%, $170; aggregate demand will increase by a multiple of the decrease in investment depending on the size of teh multiplier