68 263
Assignments Done
99%
Successfully Done
In November 2018

Answer to Question #14243 in Macroeconomics for joseph

Question #14243
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 aand nominal inerest rate?
b. If the money supply growth rate inceases to 15 percent, how will your answer in part (a) change?

c. If you were an investor, how would the change in the money supply growth affect your real p rae?trofitability, assuming that you now receive the new nominal inerest?
d. Based on your previous answers, would you prefer a fixed or a floating interest on your investment? Which you would prefer if you thought the money supply growth was going to be reduced?

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≈0.131≈13.1%
______ ______ ______ ______

(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≈1.1058≈+10.58%

r-real interest rate
i-nominal interest rate
π-inflation
(1+r)=(1+i)/(1+π)
1.05=(1+i)/(1+0.1058)
i=(1.05*1.1058)-1
i≈0.1611≈16.11%
______ ______ ______ ______

i¹≈13.1%
i²≈16.11%
Δi=(16.11/13.1)-1≈
≈+22.98%

Nominal interest rate changed for ≈+22.98% or ≈+3.01 points.

(c)
My profitability will not change because the real interest rate didn't
change.

(d)
I prefer floating interest. If M is reduced, than I prefer fixed interest.

Need a fast expert's response?

Submit order

and get a quick answer at the best price

for any assignment or question with DETAILED EXPLANATIONS!

Comments

No comments. Be first!

Leave a comment

Ask Your question

Submit
Privacy policy Terms and Conditions