Based on the shift of aggregate demand from AD to AD1, the aggregate demand would have changed by -$30 Billion.
The expenditures multiplier based on the MPC is 5.
The investment needs to change by $6 billion.
To get to the required investment demand, the Fed needs to change rates from 10% to <u>7%</u> and would need to adjust the money supply by $20 billion increase.
<h3>What is the change in aggregate demand?</h3>
This can be found as:
= ADI - Real GDP at AD
= 90 - 120
= -$30 billion.
<h3>What is the expenditure multiplier?</h3>
This can be found as:
= 1 / ( 1 - MPC)
= 1 / (1 - 0.8)
= 5
<h3 /><h3>What should the investment change by?</h3>
Investment demand should change by:
= Shortfall in GDP / Multiplier
= 30 / 5
= $6 billion
<h3>What interest rate should the Fed implement to the investment level required?</h3>
Investment amount required:
= Current investment + Required investment
= 10 + 6
= $16 billion
Rate needs to become 7% according to graph.
<h3>How much should money supply be adjusted?</h3>
In order to get to the desired 7%, the money supply needs to increase to $50 billion. The adjustment is:
= New level - Current level
= 50 - 30
= $20 billion
Find out more on Money supply at brainly.com/question/3625390.
