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In: Economics

In Country A, assume that the velocity of money is constant. Real GDP grows by 7...

In Country A, assume that the velocity of money is constant. Real GDP grows by 7 percent per year, the money stock grows at 15 percent per year, and the nominal interest rate is 10 percent. What is the real interest rate? Show your work.

Solutions

Expert Solution

Ans) Real interest rate = -8 %

Inflation = nominal interest rate - real interest rates

= 10 - real interest rate

Money supply growth + velocity growth = inflation rate + real GDP growth

15 + 0 = 10 - real interest rate + 7

Real interest rate = -8 %

Rahul Sunny answered 2 years ago
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