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
Well 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.
Thank You, its a review and i don't have the book yet---
Of course, I can help you with your questions! Let's go through each question step by step:
1. To find the real interest rate, we need to use the Fisher Equation, which states that the nominal interest rate (i) is equal to the sum of the real interest rate (r) and the expected inflation rate (π):
i = r + π
In this case, we are given the nominal interest rate (i) as 11 percent. However, we need to find the real interest rate (r), so we have to substitute the information given. We know that the velocity of money is constant and real GDP grows by 5 percent per year, while the money stock grows by 14 percent per year. This information allows us to determine the expected inflation rate as follows:
Expected inflation rate (π) = Money growth rate - Real GDP growth rate
π = 14% - 5% = 9%
Now that we have the expected inflation rate, we can substitute it into the Fisher Equation to find the real interest rate:
11% = r + 9%
To solve for r:
r = 11% - 9% = 2%
Therefore, the real interest rate is 2 percent.
2. To understand the effects of a $100 billion increase in taxes with a marginal propensity to consume (MPC) of 0.6, we need to examine the different components of saving and investment.
a. Public saving refers to the government's saving. When taxes are increased, public saving increases by the amount of the tax increase. In this case, the government raises taxes by $100 billion, so public saving increases by $100 billion.
b. Private saving comprises individual and household saving. The change in private saving is influenced by the marginal propensity to consume (MPC). The MPC represents the portion of additional income that individuals and households will consume rather than save. In this case, the MPC is given as 0.6, which means that for every additional dollar earned, individuals save 40 percent. Since taxes are increased by $100 billion, individuals and households will have $100 billion less to spend. With an MPC of 0.6, $60 billion (0.6 times $100 billion) will be spent, and the remaining $40 billion will be saved. Therefore, private saving decreases by $40 billion.
c. National saving is the sum of public saving and private saving. We calculated earlier that public saving increases by $100 billion and private saving decreases by $40 billion. Therefore, the net effect on national saving is an increase of $60 billion ($100 billion - $40 billion).
d. Investment represents the total amount of resources that are allocated to increase the capital stock. National saving is closely related to investment, as it represents the savings available for investment (also known as the savings-investment identity). In this case, since national saving has increased by $60 billion, investment would also increase by $60 billion.
To summarize the changes:
a. Public saving rises by $100 billion.
b. Private saving falls by $40 billion.
c. National saving rises by $60 billion.
d. Investment rises by $60 billion.
I hope this helps! Let me know if you have any further questions.