Solved on Jan 18, 2024

Determine the inflation rate in an economy with 3% real GDP growth and 4% money growth.
$\pi = \mu - g$ , where $\pi$ is the inflation rate, $\mu$ is the money growth rate, and $g$ is the real GDP growth rate.

STEP 1

Assumptions
1. The real GDP growth rate is 3%.
2. The money supply growth rate is 4%.
3. The velocity of money is constant.
4. The Fisher Equation, which relates the money supply, velocity of money, price level, and output, is applicable.

STEP 2

The Fisher Equation in economics states that the product of the money supply (M) and the velocity of money (V) is equal to the product of the price level (P) and the real output (Y), or real GDP.
$M \times V = P \times Y$

STEP 3

The percentage change in the product of two variables is approximately the sum of the percentage changes in each variable. Therefore, the percentage change in the money supply plus the percentage change in velocity equals the percentage change in the price level plus the percentage change in real GDP.
$\% \Delta M + \% \Delta V = \% \Delta P + \% \Delta Y$

STEP 4

Given that the velocity of money is constant, its percentage change is zero.
$\% \Delta V = 0$

STEP 5

Substitute the given values and the change in velocity into the equation from STEP_3.
$4\% + 0 = \% \Delta P + 3\%$

STEP 6

Solve for the percentage change in the price level, which represents the inflation rate.
$\% \Delta P = 4\% - 3\%$

STEP 7

Calculate the inflation rate.
$\% \Delta P = 1\%$
The inflation rate is 1%.

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Determine the inflation rate in an economy with 3% real GDP growth and 4% money growth.
$\pi = \mu - g$ , where $\pi$ is the inflation rate, $\mu$ is the money growth rate, and $g$ is the real GDP growth rate.

STEP 1

Assumptions
1. The real GDP growth rate is 3%.
2. The money supply growth rate is 4%.
3. The velocity of money is constant.
4. The Fisher Equation, which relates the money supply, velocity of money, price level, and output, is applicable.

STEP 2

The Fisher Equation in economics states that the product of the money supply (M) and the velocity of money (V) is equal to the product of the price level (P) and the real output (Y), or real GDP.
$M \times V = P \times Y$

STEP 3

STEP 4

Given that the velocity of money is constant, its percentage change is zero.
$\% \Delta V = 0$

STEP 5

Substitute the given values and the change in velocity into the equation from STEP_3.
$4\% + 0 = \% \Delta P + 3\%$

STEP 6

Solve for the percentage change in the price level, which represents the inflation rate.
$\% \Delta P = 4\% - 3\%$

STEP 7

Calculate the inflation rate.
$\% \Delta P = 1\%$
The inflation rate is 1%.

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Determine the inflation rate in an economy with 3% real GDP growth and 4% money growth.π=μ−g\pi = \mu - gπ=μ−g, where π\piπ is the inflation rate, μ\muμ is the money growth rate, and ggg is the real GDP growth rate.

STEP 1

Assumptions1. The real GDP growth rate is 3%.2. The money supply growth rate is 4%.3. The velocity of money is constant.4. The Fisher Equation, which relates the money supply, velocity of money, price level, and output, is applicable.

STEP 2

The Fisher Equation in economics states that the product of the money supply (M) and the velocity of money (V) is equal to the product of the price level (P) and the real output (Y), or real GDP.M×V=P×YM \times V = P \times YM×V=P×Y

STEP 3

STEP 4

Given that the velocity of money is constant, its percentage change is zero.%ΔV=0\% \Delta V = 0%ΔV=0

STEP 5

Substitute the given values and the change in velocity into the equation from STEP_3.4%+0=%ΔP+3%4\% + 0 = \% \Delta P + 3\%4%+0=%ΔP+3%

STEP 6

Solve for the percentage change in the price level, which represents the inflation rate.%ΔP=4%−3%\% \Delta P = 4\% - 3\%%ΔP=4%−3%

STEP 7

Calculate the inflation rate.%ΔP=1%\% \Delta P = 1\%%ΔP=1%The inflation rate is 1%.

Start learning now

Download Studdy AI Tutor now. Learn with ease and get all help you need to be successful at school.

Determine the inflation rate in an economy with 3% real GDP growth and 4% money growth.
$\pi = \mu - g$ , where $\pi$ is the inflation rate, $\mu$ is the money growth rate, and $g$ is the real GDP growth rate.

Assumptions
1. The real GDP growth rate is 3%.
2. The money supply growth rate is 4%.
3. The velocity of money is constant.
4. The Fisher Equation, which relates the money supply, velocity of money, price level, and output, is applicable.

The Fisher Equation in economics states that the product of the money supply (M) and the velocity of money (V) is equal to the product of the price level (P) and the real output (Y), or real GDP.
$M \times V = P \times Y$

Given that the velocity of money is constant, its percentage change is zero.
$\% \Delta V = 0$

Substitute the given values and the change in velocity into the equation from STEP_3.
$4\% + 0 = \% \Delta P + 3\%$

Solve for the percentage change in the price level, which represents the inflation rate.
$\% \Delta P = 4\% - 3\%$

Calculate the inflation rate.
$\% \Delta P = 1\%$
The inflation rate is 1%.