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December 18, 2014

December 18, 2014

Posted by **greg** on Tuesday, October 23, 2007 at 4:49pm.

1. In the Country of Wiknam, the velocity of money is constant. Real GDP grows by 5 percent per year, the money stock grows by 14 percent per year, and the nominal interest rate is 11 percent. What is the real interest rate?

2. The goverment raises taxes by $100 billion. If the marginal propensity to consume is 0.6, what happens to the following? Do they rise or fall? By what amounts?

a. Public saving

b. Private saving

c. National saving

d. Investment

- ECON -
**economyst**, Tuesday, October 23, 2007 at 5:58pmWell Greg. You have posted this question a number of times. Yet you still have not shown your own thinking on this problem. The volunteers here want to help students. This does not mean doing the student's homework. Trust me, you will get a much better response if, when you post a question, you also provide some notion of what the answer is.

That said:

1) Start with MV=PQ=GNP (A hint I provided in an earlier post.) Since V is constant (given), and M is growing by 14% (given). Nominal GNP must be growing by 14% Since real GNP is growing by 5% (given), Inflation must be 9%. Real interest rate is the nominal rate less the inflation rate. So, the real rate is 11%-9% = 2%

2) You are givin MPC=.6, which means MPS=.4. The income multiplier (in this extremely simple world) is 1/MPS=2.5. So Taxes go up by 100B (assume the additional tax revenues are dumped into the ocean), which means GNP falls by 2.5*100 = 250B. Which means private savings falls by .4*250 = 100B. Public savings is taxes. Total nationals savings is Taxes + private savings = +100-100 = 0.

Savings=investment. investment falls by $100.

- ECON -
**Anonymous**, Tuesday, October 23, 2007 at 10:28pmThank You, its a review and i dont have the book yet---

- ECON -

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