Question

1.     Assume that velocity is constant, money growth is 5 percent per year, and real GDP is growing at 2 percent per year. 

Y=10,000 

T=2,500 

G=3,000 

C=1000+0.8(Y-T) 

I=2000-2000r 

Given the above information, compute: 

a.     , and S (i.e., private, government, and national saving),

b.     r  (the real interest rate),

c.     (the inflation rate),

d.     i  (the nominal interest rate).

Answer 1

(a)

$S=Y-C$

$=10,000-[1000+0.8(10,000-2500)]$

$=3000$

(b)

$r=\frac{i-g}{1+g}$

$r= \frac {(2000-2000r)-3000}{1+3000}$

$r=-0.2$ %

(c)

$1+i=(1+r)(1+\pi)$

$1+2400=(1-0.2)(1+\pi)$

$\pi =2400$

(d)

$i=2000-2000r$

$=2000+400$

$=2400$