The economy of Wakanda in year 2016 had money supply of 100 million of Wakandian
ID: 1154788 • Letter: T
Question
The economy of Wakanda in year 2016 had money supply of 100 million of Wakandian dollars (W$), real GDP was W$250 million and price level was 2. In 2017, the Wakandian economy had money supply of W$110 million, real GDP was W$275 million and price level was 2.1. Which of the following statements about the Wakandian economy is correct? (a) Velocity of money is constant and equal to 5. (b) Inflation between 2016 and 2017 was 20%. (c) Velocity of money grew 5%. (d) If nominal interest rate in 2017 was 7.25%, then the real interest rate would be 2.25%. (e) Two or more of the above
Explanation / Answer
Calculate velocity in 2016 -
Velocity = [Price level in 2016 * Real GDP in 2016]/Money supply in 2016
Velocity = [ 2 * W$250 million]/W$100 million = 5
The velocity in 2016 is 5.
Calculate the velocity in 2017 -
Velocity = [Price level in 2017 * Real GDP in 2017]/Money supply in 2017
Velocity = [ 2.1 * W$275 million]/W$110 million = 5.25
The velocity in 2017 is 5.25.
Calculate the percentage change in velocity -
% change = [(velcoity in 2017 - velocity in 2016)/velocity in 2016] * 100
% change = [(5.25 - 5)/5] * 100 = 5%
The velocity of money grew by 5%.
Inflation rate in 2017 = [(Price level in 2017 - Price level in 2016)/Price level in 2016] * 100
Inflation rate in 2017 = [(2.1 - 2)/2] * 100 = 5%
The inflation rate in 2017 is 5%.
Nominal interest rate in 2017 = 7.25%
Real interest rate = Nominal interest rate - Inflation rate = 7.25% - 5% = 2.25%
The real interest rate in 2017 is 2.25%.
Hence, the correct answer is the option (e).
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