Given money demand, by how much would the Moola central bank need to change the money supply to close the output gap?

A. 5%

B. $20

C.-$20

D. $100 increase

E.$2

Explanation:

a. Calculation for the equilibrium interest rate in Moola

When we look at the table we would actually see that Money supply amount of $500 equal the Money demand amount of $500 which means that the equilibrium interest rate will be 5 percent.

b. The level of investment at the equilibrium interest rate.

Since we have 5% as the equilibrium interest rate which means that the investment at the equilibrium interest rate will be $20.

c. If we look at table we are going to see that the potential GDP of the amount of $330 and the actual GDP of the amount of $350 are beside the interest rate of 5 percent and we could as well see that actual GDP is lower than potential GDP which means that there is negative recessionary GDP gap.

Hence,

Recessionary GDP gap= Actual GDP - Potential GDP

Recessional GDP gap=Actual GDP $330- Potential GDP=-$20

Therefore-$20 will be the recessionary GDP gap.

d. In order for us to eliminate the recessionary gap, so that actual GDP amount can equal potential GDP , this means we have to increase the money supply to the amount of $600 which will inturn lead to an increase of $100

e. Calculation for the expenditure multiplier,

Expenditure multiplier=(Potential GDP $350-Actual GDP $330)/($20-$10)

Expenditure multiplier=$20/10

Expenditure multiplier=$2

Therefore the Expenditure multiplier will be $2

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