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
1. To find the real interest rate, we need to use the Fisher equation, which relates the nominal interest rate (i) to the real interest rate (r) and the expected inflation rate (π).
The Fisher equation is given as follows:
(1 + i) = (1 + r) * (1 + π)
In this case, we know that the nominal interest rate is 11 percent, and we are trying to find the real interest rate. The expected inflation rate is not provided, so we cannot directly solve for the real interest rate. However, we can make an assumption about the expected inflation rate.
Let's assume that the expected inflation rate is 4 percent. We can substitute the values into the Fisher equation and solve for the real interest rate:
(1 + 0.11) = (1 + r) * (1 + 0.04)
1.11 = (1 + r) * 1.04
Now, we can solve for the real interest rate (r):
1.11 / 1.04 = 1 + r
r ≈ 1.0673 - 1 ≈ 0.0673 (or 6.73%)
Therefore, assuming an expected inflation rate of 4%, the real interest rate in Wiknam is approximately 6.73%.
2. When the government raises taxes by $100 billion and the marginal propensity to consume is 0.6, the following changes occur:
a. Public saving: Public saving will increase by the amount of the tax increase. In this case, public savings will rise by $100 billion.
b. Private saving: Private saving is affected by the change in disposable income resulting from the tax increase. The marginal propensity to consume (MPC) is defined as the change in consumption divided by the change in disposable income. If the MPC is 0.6, it means that for every additional dollar of disposable income, 60 cents will be consumed and 40 cents will be saved. Since taxes have increased by $100 billion, disposable income will decrease by the same amount. Therefore, private saving will increase by 40% of $100 billion, which is $40 billion.
c. National saving: National saving is the sum of public and private saving. Therefore, national saving will increase by the sum of the changes in public and private saving. In this case, national saving will rise by $100 billion + $40 billion, which is $140 billion.
d. Investment: By the basic national income accounting identity, national saving equals domestic investment. Therefore, the increase in national saving of $140 billion will lead to an increase in investment of the same amount.
In summary, the changes in the following are as follows:
a. Public saving: Rises by $100 billion.
b. Private saving: Rises by $40 billion.
c. National saving: Rises by $140 billion.
d. Investment: Rises by $140 billion.