Question

In: Economics

Other things the same, an increase in the money supply causes the interest rate to rise...

Other things the same, an increase in the money supply causes the interest rate to rise to balance money supply and money demand.

True

False

If the government increases expenditures by $200 billion dollars, the MPC = .80 and there are no crowding out effects, in which direction and by how far does the aggregate demand curve shift?

it shifts left by $360 billion.

it shifts left by $1,000 billion.

it shifts right by $360 billion.

it shifts right by $1000 billion

Solutions

Expert Solution

An increase in the money supply causes the interest rate to decline as the money supply is now in excess to money demand so there is a competition among banks to provide more and more loans. Hence the statement is False

If the government increases expenditures by $200 billion dollars, and the MPC = .80 then the MPS is 1 - 0.8 = 0.2 and multiplier is 1/0.2 = 5. Since, there are no crowding out effects, aggregate demand curve shift to the right and the size of the shift is 5 x 200 = $1000 or $1 million. It shifts right by $1000 billion

Rahul Sunny answered 2 years ago
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