Question: 1. Suppose for each 0.25-percentage-point decrease in the equilibrium interest rate induces a $10 billion increase in real planned investment spending by businesses. In addition,

1. Suppose for each 0.25-percentage-point decrease in the equilibrium interest rate induces a $10 billion increase in real planned investment spending by businesses. In addition, the investment multiplier is equal to 4, and the money multiplier is equal to 3. Furthermore, every $15 billion decrease in the money supply brings about a 0.25percentagepoint increase in the equilibrium interest rate. Using the information above, if the actual GDP is $14.4 trillion and the potential GDP is $14.8 trillion, then this economy is experiencing a recessionary gap of $ billion. As a result of this gap, real planned investment spending should increase by $___billion. In order to change real planned investment spending by that amount, the money supply for the banking system must increase by $___billion. In order to change the money supply by that amount, the Fed buys 5 billion in bonds
Step by Step Solution
There are 3 Steps involved in it
Get step-by-step solutions from verified subject matter experts
