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The growth rate of real GDP is 6.4%The growth rate of nominal GDP is 7.8%The nominal interest rate is 4.2%The real interest rate is 2.8%The money supply​ (M2) is $11,438(in billions) Use the information given above to calculate the inflation rate. According to the quantity theory of​ money, if in a​ year's time, real GDP grew from​ $10 trillion to​ $10.2 trillion, and nominal GDP for the same time period grew from​ $10 trillion to​ $10.5 trillion, what is the growth rate of money supply? And the inflation rate?

Question

The growth rate of real GDP is 6.4%

The growth rate of nominal GDP is 7.8%

The nominal interest rate is 4.2%

The real interest rate is 2.8%

The money supply​ (M2) is $11,438(in billions)

 

Use the information given above to calculate the inflation rate.

 

  • According to the quantity theory of​ money, if in a​ year's time, real GDP grew from​ $10 trillion to​ $10.2 trillion, and nominal GDP for the same time period grew from​ $10 trillion to​ $10.5 trillion, what is the growth rate of money supply? And the inflation rate?
check_circleAnswer
Step 1

According to the quantity theory of money, inflation rate can be calculated as follows:

Inflation rate Nominal interest rate - Real interest rate
= 4.2 2.8
=1.4
Thus, the value of inflation rate is 1.4%.
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Inflation rate Nominal interest rate - Real interest rate = 4.2 2.8 =1.4 Thus, the value of inflation rate is 1.4%.

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Step 2

The real GDP growth rate:

Currenteal GDP -Past GDPX100
Real GDP growth rate =
PastalGDP
rea
10.2 -10
x100
10
= 2
Thus, the real GDP growth rate is 2%
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Image Transcriptionclose

Currenteal GDP -Past GDPX100 Real GDP growth rate = PastalGDP rea 10.2 -10 x100 10 = 2 Thus, the real GDP growth rate is 2%

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Step 3

The nominal GDP gr...

Currentminal GDP - Pastominal GDPx100
Pastominal GDP
Nominal GDP growth rate |
N
10.5-10
x 100
10
Thus, the nominal GDP growth rate is 5%.
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Image Transcriptionclose

Currentminal GDP - Pastominal GDPx100 Pastominal GDP Nominal GDP growth rate | N 10.5-10 x 100 10 Thus, the nominal GDP growth rate is 5%.

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