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# Answer to Question #14165 in Economics of Enterprise for Lahja Sheehamandje

Question #14165
suppose real GDP is growing at 4 percent, the money supply is growing at 11 percent, the velocity of money is constant and the real interest rate is 6 percent. a. what is the current inflation rate and nominal interest rate? b.if the money supply growth rate increases to 15 percent, how will your answers in part (a) change?
(i) M/P=Y/V
Y - growing by 3% so coeficient = 1.03
M - growing by 10% so coeficient = 1.10
V - constant =1
1.1/P=1.03/1
P=1.1/1.03&asymp;1.068&asymp;+6.8%

r-real interest rate
i-nominal interest rate
&pi;-inflation
(1+r)=(1+i)/(1+&pi;)
1.05=(1+i)/(1+0.068)
i=(1.05*1.068)-1
i&asymp;0.1214&asymp;12.14%
______ ______ ______ ______

(ii)
M/P=Y/V
Y - growing by 3% so coeficient = 1.03
M - growing by 15% so coeficient = 1.15
V - constant =1
1.15/P=1.03/1
P=1.15/1.03&asymp;1.1165&asymp;+11.65%

r-real interest rate
i-nominal interest rate
&pi;-inflation
(1+r)=(1+i)/(1+&pi;)
1.05=(1+i)/(1+0.1165)
i=(1.05*1.1165)-1
i&asymp;0.1723&asymp;17.23%
______ ______ ______ ______

i&sup1;&asymp;12.14%
i&sup2;&asymp;17.23%
&Delta;i=(17.23/12.14)-1&asymp;
&asymp;1.4195-1&asymp;+41.95%

Nominal interest rate changed for &asymp;+41.95% or &asymp;+5.09 points.

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