In the economy of Wiknam the velocity of moeny is constant. Real GDP grows by 3...

In the economy of Wiknam the velocity of moeny 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:

a. the growth rate of nominal GDP?

b. the inflation rate?

c.the real interest rate?

Solutions

Expert Solution

Consider the given problem here according to the quantity theory of money the following relation should hold.

=> M*V = P*Y, where M=money supply, V=velocity of money, P= price level and Y=output or real GDP. This equation is growth form is given by.

=> g(m) + g(v) = g(p) + g(y), where we have given that the growth of “v” is “0”, growth of “M” is “8%” and the growth of real GDP that “Y” is 3%.

=> 8 = g(p) + 3, => g(p) = 8 – 3 = 5, => g(p) = 5.

So, here the rate of inflation is “5%”, if we put the this value in the above equation we will get the growth rate of nominal GDP is “g(y) + g(p) = 3+5 = 8%”, => the nominal GDP is growing at the rate “8%”.

The rate of inflation is “5%” and the nominal interest rate is “9%”, => the real interest rate is the difference between nominal interest rate and the inflation rate.

=> real interest rate = nominal interest rate – inflation rate = 9 – 5 = 4%, => real interest rate is 4 percent.

Rahul Sunny answered 1 year ago

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