If the velocity of circulation is constant, real GDP is growing at 3 percent a year, the real interest rate is 2 percent a year, and the nominal interest rate is 7 percent a year.
a)What is the inflation rate?
b)What is the growth rate of money?
c)What is the growth rate of nominal GDP?
Take a shot. What do you think.
a) 3%
b) 2%
c) 7%
Is this correct?
Im guessing that you are just guessing.
a) The difference between nominal and real interest is the rate of inflation. Ergo, a) is 5%.
c) The difference between nominal and real growth rates is the rate of inflation. Ergo in this simplistic example, c) is 8% (BTW, I would count you right if you said 8.15%)
b) MV=PQ and PQ is nominal GNP. Since V is constant and PQ is growing by 8%, M must also be growing by 8%. b) is 8%
4 answers