Check my work 6 The tables below show hypothetical schedules for money demand, money supply, aggregate demand, and aggregate supply in an economy whose natural unemployment rate is estimated to be 5.5 percent. 8 01:45:42 Nominal Interest Rate Quantity Demanded (Dm) Quantity Supplied (Smo) ($ Quantity Supplied (5m1) ($ (*) ($ billions) billions) billions) 16 25 40 12 30 40 8 40 40 4 60 40 Real GDP Price Level (2012 = 100) (ADO) (2012 $ billions) (AD1) (2012 $ billions) (As) (2012 $ billions) 150 600 702 140 650 650 130 700 520 120 750 195 110 800 a. On one graph draw the money demand and initial money supply curves, Dm and Smo, and on another graph draw the initial aggregate demand curve and the andrenate supply curve ADn and AS Plot only the endnoints of the money supply and andrenate demand curves a. On one graph draw the money demand and initial money supply curves, Dm and Smo, and on another graph draw the initial aggregate demand curve and the aggregate supply curve, ADo and AS. Plot only the endpoints of the money supply and aggregate demand curves, and four points each for the money demand and aggregate supply curves. Money Market 16 Tools 14 Dm Smo 10 Smi Nominal Interest Rate (%) N The Economy 180 Tools 60 140 ADO AD AS Price Level (2012 = 100) 8 8 8 8 8 2 0 100 200 300 400 500 600 700 800 900 Real GDP (2012 $ billions) b. What is the equilibrium interest rate in the money market? What are the equilibrium price level and real output in the economy? The initial equilibrium interest rate is %. The initial equilibrium price level and real output are [ and $ billion. c. Suppose the economy is facing an unemployment rate of 8 percent and a rising rate of inflation. Is this economy facing a recessionary or inflationary gap? Should its central bank use a contractionary or expansionary monetary policy? This economy is facing a inflationary gap . Central bank should use contractionary |monetary policy. d. If the monetary policy applied in part c causes the money supply to change by $10 billion, show the effect on the money market by filling in the Quantity Supplied (Sm1) column in the first table and draw the new money supply curve, Sm1, on your graph. Plot only the endpoints of the new curve. What is the new equilibrium interest rate? percent e. If the change in the interest rate in part d causes a $180 billion change in real expenditures at every price level, show the effect on the economy by filling in the Real GDP (AD,) column in the second table and draw the new aggregate demand curve, AD1, on your graph. Plot only the endpoints of the new curve. What are the new equilibrium price level and real output in this economy? The new price level and real output are [ and $ [ billion. f. Is the change in equilibrium real output greater than or less than the shift in the AD curve? The change in equilibrium real output is less than the shift in the AD curve
