Question #14162

suppose real GDP is growing at 4 percent, the money supply is growing at 11 percent, the velocity of the money is constant,and the real interest is 6 percent. what is the current inflation rate and nominal interest rate?

Expert's answer

(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≈1.068≈+6.8%

r-real interest rate

i-nominal interest rate

π-inflation

(1+r)=(1+i)/(1+π)

1.05=(1+i)/(1+0.068)

i=(1.05*1.068)-1

i≈0.1214≈12.14%

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≈1.068≈+6.8%

r-real interest rate

i-nominal interest rate

π-inflation

(1+r)=(1+i)/(1+π)

1.05=(1+i)/(1+0.068)

i=(1.05*1.068)-1

i≈0.1214≈12.14%

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