Between 1916 and 1920, the US money stock increased at an average annual rate of
ID: 1224908 • Letter: B
Question
Between 1916 and 1920, the US money stock increased at an average annual rate of 13.66% and the price level grew at an average annual rate of 13.26%. The equilibrium condition from the money market implies that % /M=%/ P +%/L where L is real money demand, an increasing function of real GDP and a decreasing function of the nominal interest rate. Given the data in this question, what was the average annual rate of growth of real money demand between 1916 and 1920? Is the fact that real GDP grew at an average annual rate of only 1.26% and nominal interest rates roughly doubled during this period help to explain your result? Why or why not?
Explanation / Answer
Change in money supply = Change in Price + change in real money demand
13.66= 13.26+ real money
Real money growth = 13.66-13.26 = 0.4%
The real money growth is just 0.4%.
Nominal intrest rates will rise with price level and this is quite common.
GDP growth would also be high during such periods, But the trick here is the real gdp growth which is inflation adjuseted will be lower.
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