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? Hint: MV=PQ=(nominal GNP)
Oh shoot, i don't have the text right now---am at work and need to know what thses do for review--PLEASE HELP??
1. To find the real interest rate, we need to use the equation Fisher Equation. This equation relates the nominal interest rate (i) to the real interest rate (r) and the expected inflation rate (π):
r = i - π
In this case, we are given the nominal interest rate (i) as 11 percent. However, we are not provided with the expected inflation rate (π). Therefore, we are unable to directly calculate the real interest rate (r) without this information.
2. When the government raises taxes by $100 billion and the marginal propensity to consume (MPC) is 0.6, the following changes will occur:
a. Public saving: Public saving will increase. This is because taxes are considered a part of government revenue and will directly contribute to increasing public saving. The increase in public saving will be equal to the increase in tax revenue, which is $100 billion.
b. Private saving: Private saving will increase. When taxes increase, individuals have less disposable income available for consumption. This leads to an increase in private saving as individuals save more of their income. The increase in private saving will be a fraction of the increase in taxes, in this case, 0.6 (MPC) multiplied by $100 billion, resulting in an increase of $60 billion.
c. National saving: National saving is the sum of public and private saving. Since both public and private saving increase, national saving will increase as well. The increase in national saving will be equal to the sum of the increase in public saving and private saving, which is $100 billion + $60 billion = $160 billion.
d. Investment: Investment is a component of national saving. Therefore, an increase in national saving will also lead to an increase in investment. The increase in investment will be equal to the increase in national saving, which is $160 billion.