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Chapter 15

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Bridget O' Shaughnessy

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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. 4. a. 1 multiplier = 1 − MPC 1 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
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