Anwer the questions below using the following information? The growth rate of real GDP is 2.3%....
Anwer the questions below using the following information?
The growth rate of real GDP is
2.3%.
The growth rate of nominal GDP is
5.1%.
The nominal interest rate is
7.1%.
The real interest rate is
4.3%.
The money supply (M2) is
10,612
(in billions)
Using the information given above,
The growth rate of the money supply must be %.
(Round your answer to the nearesttenth.)
The inflation rate is %.
Homework Answers
Answer
(a)
According to Quantity theory of Money :
MV = PY
where M = Quantity of money supply, V = Velocity of Money, P = Price level and Y = Real GDP and P*Y = Nominal GDP
Formula :
% change in (A*B) = % change in A + % change in B
=> % change in (MV) = % change in (P*Y) = % change in (Nominal GDP)
=> % change in M + % change in V = % change in (Nominal GDP)
It is given that % change in (P*Y) = % change in Nominal GDP = 5.1%.
According to Quantity theory of money, Velocity of money is constant and hence % change in V = 0
=> % change in M + 0 = 5.1%
=> % change in M = 5.1%
Hence, The growth rate of the money supply must be 5.1%.
(b)
Formula :
% change in (PY) = % change in P + % change in Y
It is given that % change in (P*Y) = % change in Nominal GDP = 5.1% and % change in Y = % change in Real GDP = 2.3%
=> 5.1% = % change in P + % change in Y + 2.3%
=> % change in P = 2.8%
As inflation rate is defined as the % increase in price level
Hence Inflation rate = % change in Price level = % change in P = 2.8%(Note P increases thus there is inflation).
Hence, The inflation rate = 2.8%.
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