Question #14228

Suppose real GDP is growing at 4 percentage , the money supply is growing at 11 percentage , the velocity of moey is costant and the real interest rate is 6 percentage.
What is the currect inflation rate and interest rate

Expert's answer

a) M/P=Y/V

Y - growing by 4% so coefficient = 1.04

M - growing by 11% so coefficient = 1.11

V - constant =1

1.11/P=1.04/1

P=1.11/1.04≈1.067≈+6.7%

r-real interest rate

i-nominal interest rate

π-inflation

(1+r)=(1+i)/(1+π)

1.06=(1+i)/(1+0.067)

i=(1.06*1.067)-1

i≈0.13102≈13.10%

______ ______ ______ ______

(b)

M/P=Y/V

Y - growing by 4% so coefficient = 1.04

M - growing by 15% so coefficient = 1.15

V - constant =1

1.15/P=1.04/1

P=1.15/1.04≈1.1057692≈+10.57%

r-real interest rate

i-nominal interest rate

π-inflation

(1+r)=(1+i)/(1+π)

1.06=(1+i)/(1+0.1057)

i=(1.06*1.1057)-1

i≈0.1720≈17.20%

______ ______ ______ ______

i¹≈13.10%

i²≈17.20%

Δi=(17.20/13.10)-1≈

≈1.3129-1≈+31.29%

Y - growing by 4% so coefficient = 1.04

M - growing by 11% so coefficient = 1.11

V - constant =1

1.11/P=1.04/1

P=1.11/1.04≈1.067≈+6.7%

r-real interest rate

i-nominal interest rate

π-inflation

(1+r)=(1+i)/(1+π)

1.06=(1+i)/(1+0.067)

i=(1.06*1.067)-1

i≈0.13102≈13.10%

______ ______ ______ ______

(b)

M/P=Y/V

Y - growing by 4% so coefficient = 1.04

M - growing by 15% so coefficient = 1.15

V - constant =1

1.15/P=1.04/1

P=1.15/1.04≈1.1057692≈+10.57%

r-real interest rate

i-nominal interest rate

π-inflation

(1+r)=(1+i)/(1+π)

1.06=(1+i)/(1+0.1057)

i=(1.06*1.1057)-1

i≈0.1720≈17.20%

______ ______ ______ ______

i¹≈13.10%

i²≈17.20%

Δi=(17.20/13.10)-1≈

≈1.3129-1≈+31.29%

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