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

  1. 👍
  2. 👎
  3. 👁
  1. % Change in M + % Change in V = % Change in P + % Change in Y.
    i.e, % Change in P = % Change in M + % Change in V – % Change in Y.

    % Change in P = 14% + 0% – 5% = 9%.
    % Change in P is the inflation rate π. From the Fisher equation, we have
    i = r + π,
    i is the nominal interest rate and r is the real interest rate. i is given as 11% in the problem, and we just calculated above that π is 9%. Hence, r is 2%

    1. 👍
    2. 👎

Respond to this Question

First Name

Your Response

Similar Questions

  1. macroeconomics

    27. The following data show nominal GDP and the appropriate price index for several years. Compute real GDP for each year and indicate whether you have “inflated” or “deflated” nominal GDP in finding real GDP. All GDP are

  2. Geography

    This former Soviet Republic still largely depends on its neighbor Russia for most of its trade and business. Roughly 30% of this country's economy is centered on agriculture and manufacturing but is growing in its development of

  3. civics

    The Economist magazine measures the quality of life around the world. It uses nine factors about the quality of life in a country, including GDP per capita, as an indicator. The table below shows the statistics for Ireland and the

  4. econ

    Last year real GDP in the imaginary nation of Populia was 907.5 billion and the population was 3.3 million. The year before real GDP was 750 billion and the population was 3 million. What was the growth rate of real GDP per person

  1. macroeconomics

    23. The next four questions refer to the following price and output data over a five-year period for an economy that produces only one good. Assume that year 2 is the base year. Units of Price Year output per unit 1 16 $2 2 20 3 3

  2. Economics

    How is real GDP different from nominal GDP? A. Real GDP is adjusted for inflation and often appears higher than nominal GDP. B. Real GDP is adjusted for inflation and often appears lower than nominal GDP. *** C. Real GDP is not

  3. Macroeconomics

    Suppose the Fed wishes to use monetary policy to close an expansionary gap. a. Should the Fed increase or decrease the money supply? b. If the Fed uses open-market operations, should it buy or sell government securities? c.

  4. Macroeconomics

    The money supply in Freedonia is $200 billion. Nominal GDP is $800 billion and real GDP is $400 billion. Assuming that velocity is stable, if real GDP grows by 10 percent this year, and if the money supply does not change this

  1. Macroeconomics

    Consider the following data: The money supply in $1 trillion, the price level equals 2, and real GDP is $5 trillion in base-year dollars. What is the income velocity of money?

  2. Economics

    21. How do fears of future economic problems affect GDP? A. Businesses will invest more money in the short term to ensure higher profits in the future; GDP will be pushed up. B. Consumers will spend more money in the short term to

  3. Economic Question

    Sorry, this is a little long, hope somebody could give me some help. Thanks in advance. Consider the exchange rate of the dollar for the euro. Suppose that the liquidity function L(i) is the same in both the United States and

  4. Economics

    1. What effect would a decrease in consumer savings have on the aggregate demand curve? The curve would level off. The curve would shift to the right. The curve would shift to the left. The curve would not change 2. If there is an

You can view more similar questions or ask a new question.