Question

In the country of Wiknam, the velocity of money is constant. Real GDP grows by 3 percent per year, the money stock grows by 8 percent per year, and the nominal interest rate is 9 percent. What is the growth rate of nominal GDP? the inflation rate? the real interest rate?

Answer 1

Answer:

What is the growth rate of nominal GDP?

• 8%

the inflation rate?

• 5%

the real interest rate?

• 4%

Explanation:

money supply × velocity of money = price level × real GDP =  nominal GDP

since velocity of money is constant, any change in the money supply will result in an equal change in nominal GDP. Since the money supply grows by 8%, the nominal GDP also grows at 8%

growth rate of the money supply + growth rate of the velocity of money = inflation rate + real GDP growth rate

8% + 0 = inflation rate + 3%

inflation rate = 8% - 3% = 5%

real interest rate = nominal interest rate - inflation rate

real interest rate = 9% - 5% = 4%