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%
To find the correct answers for these questions, let's break down each one step by step:
a) What is the inflation rate?
The inflation rate can be calculated by finding the difference between the nominal interest rate and the real interest rate. In this case, the nominal interest rate is 7% and the real interest rate is 2%, so the inflation rate would be 7% - 2% = 5%.
b) What is the growth rate of money?
To find the growth rate of money, we can use the equation MV = PQ, where M is the money supply, V is the velocity of circulation, P is the price level, and Q is the level of real output (real GDP). In this case, the velocity of circulation is given to be constant.
Since we know that real GDP is growing at 3% per year, we can assume that the growth rate of real output (Q) is 3%. Therefore, if the velocity of circulation is constant, the growth rate of money (M) would also need to be 3% in order to match the growth rate of real output.
So, the growth rate of money would be 3%.
c) What is the growth rate of nominal GDP?
The growth rate of nominal GDP can be calculated by summing up the growth rate of real GDP (given as 3%) and the inflation rate (calculated as 5%). Therefore, the growth rate of nominal GDP would be 3% + 5% = 8%.
So, the correct answers are:
a) The inflation rate is 5%.
b) The growth rate of money is 3%.
c) The growth rate of nominal GDP is 8%.