Question 1 (a) The rates of growth of money supply is 10%, of velocity of money...
Question 1
(a) The rates of growth of money supply is 10%, of velocity of money circulation 1%, of real GDP 3%, what is the inflation rate?
(b) The nominal interest rate is 7%, the inflation rate is 5%, what is the real interest rate?
Homework Answers
a.
Velocity of money forumula
V=(P*Y)/M
V= velocity of money
M=money supply growth
P=price level or inflation
Y=real GDP
Since it is given that The rates of growth of money supply is 10%, of velocity of money circulation 1%, of real GDP 3%,
the inflation rate (P)=(V*M)/Y
P=(1*10)/3
P=10/3
P=3.33%
Hence the inflation rate will be 3.33%
b.
The nominal interest rate is 7%, the inflation rate is 5%,
Real interest rate=Nominal interest rate - inflation rate
=7%-5%
=2%
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