Suppose that the nominal interest rate is 4.2%, the real interest rate is 2.8%, real GDP...
Suppose that the nominal interest rate is 4.2%, the real interest rate is 2.8%, real GDP grows at 1%, and this year's money supply is $11.438B. To the nearest million, the size of next year's money supply will be $________B.
Homework Answers
As from fisher effect
i= r + π
π = inflation rate = 4.2-2.8 = 1.4%
So from growth rate version of Quantity Theory of money
%∆ in M + %∆ in V = %∆ in Y + π
%∆ in M =1+ 1.4 = 2.4%
assuming V is Constant
so M in next year = 11.438 + 11.438*.024
= $ 11.712512 B
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