FIGURE 27-5
-Refer to Figure 27-5.This economy begins in equilibrium with , and real GDP equal to potential GDP (with and ).Now suppose there is an increase in the money supply to $540 billion.In the long run,after all adjustments have taken place,the money supply is ________,the interest rate is ________,the price level is ________,and real GDP is ________.

Question

FIGURE 27-5
-Refer to Figure 27-5.This economy begins in equilibrium with  ,  and real GDP equal to potential GDP (with  and  ).Now suppose there is an increase in the money supply to $540 billion.In the long run,after all adjustments have taken place,the money supply is ________,the interest rate is ________,the price level is ________,and real GDP is ________.

Quizplus · Accepted Answer

An increase in the money supply will shift the LM curve to the right, leading to a new equilibrium with a higher level of output and a higher price level. In the long run, the increase in the money supply will lead to an increase in the price level and a decrease in the real money supply, shifting the LM curve back to its original position. The final equilibrium will be at the point where the new LM curve intersects the initial IS curve.

The new equilibrium will be at point E in the diagram, with a higher level of real GDP ($800 billion) and a higher price level (104). The interest rate is determined by the IS curve at this point, and it is equal to 4%.

The final money supply will depend on the money multiplier and the initial increase in the money supply. In this case, the money multiplier is 1/(1-0.25) = 4/3, so the final money supply will be:

MS = 540 x (4/3) = $720 billion

Therefore, the correct answer is E) $540 billion; 4%; 104; $800 billion.

FIGURE 27-5 -Refer to Figure 27-5.This Economy Begins in Equilibrium with