Part A - GDP, Multipliers, Output Gaps (6 Marks)

The following hypothetical data shows the demand schedule for business investment (or the amount of business investment that would be generated at various rates of interest).

Interest

Rate (%)

Business

Investment ($Billions)

0.50

360.0

0.75

355.0

1.00

350.0

1.25

340.0

1.50

330.0

1.75

320.0

2.00

310.0

2.25

295.0

2.50

280.0

2.75

265.0

3.00

250.0

Hypothetical assumptions for the economy:

Leakages are 40% of new income.

The current bank rate is 1.50%.

The current Real GDP in 2018 dollars is $2,109,000,000,000 OR$2,109 Billion

It is estimated that the potential output RGDP would be $2,159 Billion.

1. Use the information above to solve the following problem.(3 marks)

1. Identify whether there is a recessionary gap or an inflationary gap and the amount of the output gap.

1. Given that leakages are 40%, what is the amount of the multiplier on any new spending?

(2109-40% 1265.4)

1. Using the multiplier, what change in business investment spending would change GDP enough to eliminate the output gap?

1. What new rate of interest would bring about this change in business investment?