Question 1

Assume the following graph for money supply and money demand. Explain the adjustment process that would take place in this money market if the interest rate is 12 percent. Make sure that your answer includes a discussion of what happens to money balances and bond prices.

Accepted Answer

If the interest rate is 12 percent then the quantity of money in circulation will exceed the amount that households will want to hold. This excess supply of money will cause the interest rate to drop as people try to shift their funds into interest bearing bonds. The increased demand for bonds will bid their price up; i.e., the interest rate will drop.

Question 2

Related to the Economics in Practice on p. 221 [533]: What was the estimates of the study concerning a one-percentage point increase in the interest rate? Be specific.

Accepted Answer

According to their estimates, a one-percentage-point increase in the interest rate appropriate for a firm's borrowing leads to a drop in investment spending of more than one percentage point.

Question 3

Table 27.1
-Use the Table 27.1 to answer the following question. What will be the change in investment spending if the interest rate falls from 9% to 6%?

Accepted Answer

Investment will increase by $40 billion ($360 - $320 billion).

Question 4

Scenario 1
Assume that the investment demand function is represented by the following algebraic function: I = $300 - 2000r where $300 represents autonomous investment and "r" represents the interest rate.
-Using Scenario 1 calculate how high the interest rate would have to rise to drive planned investment to zero. Calculate the amount of investment that would take place at an interest rate of zero.

Accepted Answer

The answer of Scenario 1
Assume that the investment demand function...

Question 5

Scenario 1
Assume that the investment demand function is represented by the following algebraic function: I = $300 - 2000r where $300 represents autonomous investment and "r" represents the interest rate.
-Using Scenario 1, if the interest rate were 10%, calculate the level of investment.

Accepted Answer

The answer of Scenario 1
Assume that the investment demand function...

Question 6

Draw a flowchart showing the impact of an increase in interest rates on planned investment, planned aggregate expenditure and equilibrium output.

Accepted Answer

The answer of Draw a flowchart showing the impact of...

Question 7

Graphically illustrate the relationship between interest rate changes and the level of planned investment.

Accepted Answer

The answer of Graphically illustrate the relationship between interest rate...

Question 8

Suppose the investment demand function is given as the following algebraic function: I = 300 - 1000r where r is the interest rate. Calculate the amount of investment that would take place at an interest rate of ten percent. How much investment would there be if interest rates rose to fifteen percent?

Accepted Answer

The answer of Suppose the investment demand function is given...

Question 9

Critically evaluate the assumption of autonomous investment.

Accepted Answer

The answer of Critically evaluate the assumption of autonomous investment....

Question 10

Why is there a negative relationship between the interest rate and the level of investment?

Accepted Answer

The answer of Why is there a negative relationship between...

Question 11

Describe in broad terms what the money market is.

Accepted Answer

The answer of Describe in broad terms what the money...

Question 12

The textbook discusses the "crowding out effect". Can you think of any circumstances in which just the opposite effect could take place?

Accepted Answer

The answer of The textbook discusses the "crowding out effect"....

Question 13

Table 27.1
-Use the Table 27.1 to answer the following question.. Suppose the expenditure multiplier is 3. What impact on equilibrium output will there be by an increase in the interest rate from 6% to 9%, ceteris paribus?

Accepted Answer

The answer of  Table 27.1
-Use the Table 27.1 to...

Question 14

If the amount of money demanded by household and firms is less than the amount in circulation as determined by the Fed what will happen to the rate of interest and why?

Accepted Answer

The answer of If the amount of money demanded by...

Question 15

As interest rates increase what happens to planned investment and aggregate expenditure?

Accepted Answer

The answer of As interest rates increase what happens to...

Question 16

Scenario 1
Assume that the investment demand function is represented by the following algebraic function: I = $300 - 2000r where $300 represents autonomous investment and "r" represents the interest rate.
-Using Scenario 1, calculate the interest rate that would be necessary to bring about an investment of $200.

Accepted Answer

The answer of Scenario 1
Assume that the investment demand function...

Question 17

Draw a planned investment curve as it relates to the interest rate.

Accepted Answer

The answer of Draw a planned investment curve as it...

Question 18

Discuss the two links between the goods market and the money market.

Accepted Answer

The answer of Discuss the two links between the goods...

Question 19

Assume the money supply is set by the Fed at $1000 billion and the money demand function is represented by the following algebraic equation Md = 3000 - 20000r, where r = the interest rate. Calculate the interest rate which will clear this money market.

Accepted Answer

The answer of Assume the money supply is set by...

Question 20

Describe in broad terms what the goods market is.

Accepted Answer

The answer of Describe in broad terms what the goods...

Quiz 12: The Determination of Aggregate Output, the Price Level, and the Interest Rate

Assume the following graph for money supply and money demand. Explain the adjustment process that would take place in this money market if the interest rate is 12 percent. Make sure that your answer includes a discussion of what happens to money balances and bond prices.

Related to the Economics in Practice on p. 221 [533]: What was the estimates of the study concerning a one-percentage point increase in the interest rate? Be specific.

Table 27.1 -Use the Table 27.1 to answer the following question. What will be the change in investment spending if the interest rate falls from 9% to 6%?

Scenario 1 Assume that the investment demand function is represented by the following algebraic function: I = $300 - 2000r where $300 represents autonomous investment and "r" represents the interest rate. -Using Scenario 1, if the interest rate were 10%, calculate the level of investment.

Draw a flowchart showing the impact of an increase in interest rates on planned investment, planned aggregate expenditure and equilibrium output.

Graphically illustrate the relationship between interest rate changes and the level of planned investment.

Critically evaluate the assumption of autonomous investment.

Why is there a negative relationship between the interest rate and the level of investment?

Describe in broad terms what the money market is.

The textbook discusses the "crowding out effect". Can you think of any circumstances in which just the opposite effect could take place?

Table 27.1 -Use the Table 27.1 to answer the following question.. Suppose the expenditure multiplier is 3. What impact on equilibrium output will there be by an increase in the interest rate from 6% to 9%, ceteris paribus?

If the amount of money demanded by household and firms is less than the amount in circulation as determined by the Fed what will happen to the rate of interest and why?

As interest rates increase what happens to planned investment and aggregate expenditure?

Draw a planned investment curve as it relates to the interest rate.

Discuss the two links between the goods market and the money market.

Assume the money supply is set by the Fed at $1000 billion and the money demand function is represented by the following algebraic equation Md = 3000 - 20000r, where r = the interest rate. Calculate the interest rate which will clear this money market.

Describe in broad terms what the goods market is.