Posted by **Jayda** on Monday, November 27, 2006 at 2:44am.

If the velocity of circulation is constant, real GDP is growing at 3 percent a year, the real interest rate is 2 percent a year, and the nominal interest rate is 7 percent a year.

a)What is the inflation rate?

b)What is the growth rate of money?

c)What is the growth rate of nominal GDP?

Take a shot. What do you think.

a) 3%

b) 2%

c) 7%

Is this correct?

Im guessing that you are just guessing.

a) The difference between nominal and real interest is the rate of inflation. Ergo, a) is 5%.

c) The difference between nominal and real growth rates is the rate of inflation. Ergo in this simplistic example, c) is 8% (BTW, I would count you right if you said 8.15%)

b) MV=PQ and PQ is nominal GNP. Since V is constant and PQ is growing by 8%, M must also be growing by 8%. b) is 8%

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