# Econ 248 Assignment 2

Topics: Monetary policy, Inflation, Central bank Pages: 7 (1981 words) Published: January 24, 2012
ECON 248
Assignment 2
1.

2.
L = (1 - 0.35) X (1 - 0.07)
L = 0.6
Quantity of money created = \$50,000,000 X 1/(1 - 0.6)
Quantity of money created = \$50,000,000 X 2.5
Quantity of money created = \$125,000,000

3.
a) The multiplier is the amount by which a change in any component of autonomous expenditure is magnified or multiplied to determine the change that it generates in equilibrium expenditure and real GDP. Investment expenditures increase aggregate expenditure and real GDP. The increase in real GDP increases disposable income, which increases consumption expenditure. The increased consumption expenditure adds even more to aggregate expenditure. Real GDP and disposable income increase further, and so does consumption expenditure. The initial increase in investment brings an even bigger increase in aggregate expenditure because it induces an increase in consumption expenditure. The multiplier determines the magnitude of the increase in aggregate expenditure that results from an increase in investment or another component of autonomous expenditure. The greater the marginal propensity to consume, the larger is the multiplier.

b) The marginal propensity to import and the marginal tax rate together with the marginal propensity to consume determine the multiplier. Their combined influence determines the slope of the aggregate expenditure curve. Since Multiplier = 1 / (1 - Slope of AE curve) and the marginal tax rate determines the extent to which income tax payments change when real GDP changes, the size of the multiplier will decrease depending on the extent to which the marginal tax rate reduces the slope of the AE curve.

c) The slope of the AE curve equals 0.75
Multiplier = change in real GDP/change in investment = 1/(1-MPC) Multiplier = 1/(1-0.75) = 1/0.25 = 4...