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(1) In a country A, the velocity of money is constant. Real GDP grows by 4...

(1) In a country A, the velocity of money is constant. Real GDP grows by 4 percent per year, the money supply 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. real interest  rate

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Answer #1

As the velocity of money is constant, the change in nominal GDP will be due to the change in money supply, so the growth rate  in nominal GDP will be equal to the growth rate of money supply, which is 8%.

Using the quantity theory of money, the equation will be

% Change in M + % Change in V = % Change in P + % Change in Y

% change in P = % change in M + % change in V - % change in Y

= % change in P = 8+0-4

= % change in P = 4%

So the inflation rate is 4.

The nominal interest rate is 9%,

Using the Fisher equation,

Nominal rate = Real rate + Inflation

= 9 = Real rate + 4

= Real rate of interest = 5%

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