CAN ANYONE PLEASE HELP//
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
Do a little research, then take a shot. What do you think? I will be glad to critique your answer. But, I am reluctant to just give you the answer.
1. To find the real interest rate, we need to use the Fisher equation, which states that the nominal interest rate is equal to the real interest rate plus the inflation rate. Rearranging the equation, we have:
Nominal interest rate = Real interest rate + Inflation rate
Given that the nominal interest rate is 11 percent and the real GDP growth rate is 5 percent, we can find the inflation rate by subtracting the real GDP growth rate from the nominal interest rate:
11% - 5% = 6%
Therefore, the inflation rate is 6%. Now we can find the real interest rate by subtracting the inflation rate from the nominal interest rate:
Real interest rate = Nominal interest rate - Inflation rate
Real interest rate = 11% - 6% = 5%
So, the real interest rate in the Country of Wiknam is 5%.
2. When the government raises taxes by $100 billion and the marginal propensity to consume (MPC) is 0.6, we can analyze the impact on the various components:
a. Public saving: Public saving is the difference between government revenue (taxes) and government expenditure. Since taxes increase by $100 billion, public saving will rise by the same amount. Therefore, public saving rises by $100 billion.
b. Private saving: Private saving is the portion of disposable income that is saved by households. With the increase in taxes, households have less disposable income, resulting in a decrease in private saving. To calculate the change in private saving, we need to multiply the change in disposable income (which is equal to the tax increase) by the marginal propensity to consume:
Change in private saving = Change in disposable income × MPC
= -$100 billion × 0.6
= -$60 billion
Therefore, private saving falls by $60 billion.
c. National saving: National saving is the sum of public and private saving. Since public saving has risen by $100 billion and private saving has fallen by $60 billion, we need to subtract the decrease in private saving from the increase in public saving to find the change in national saving:
Change in national saving = Change in public saving + Change in private saving
= $100 billion + (-$60 billion)
= $40 billion
Therefore, national saving rises by $40 billion.
d. Investment: In a closed economy, investment equals national saving. Given that national saving has increased by $40 billion, investment also increases by the same amount. Therefore, investment rises by $40 billion.
Overall, the changes in the various components are as follows:
a. Public saving rises by $100 billion.
b. Private saving falls by $60 billion.
c. National saving rises by $40 billion.
d. Investment rises by $40 billion.