CHAPTER 15 HOMEWORK ANSWERS
Suggested problems: 1,2,4,5,6,8,9,10,11.
1. a. Increase in money supply. fInlstest
b. Decrease in money demand. Interest rate falls.
1 − MPC
3= 1 −MPC
3* 1 − MPC = 1
1 −MPC = 1/3
MPC = 2/3
b. If there is crowding out, then the multiplier would be larger than 3, so the
MPC would be larger than the answer in part (a).
5. a. Consumption would increase by 3/4 of $20 billion, or $15 billion (AD
shifts out by $15 billion).
b. There is a multiplier effect here - the AD curve will shift out by $15
billion * multiplier (which is 4) - AD shifts out by $60.
c. If the government had increased spending by $20 billion, the outward AD
shift would be $80 billion - this is because only part of a tax cut is spent,
the rest is saved.
6. If G increases, the AD curve shifts out to the right. As money demand increases
due to higher inc