ECON202
HW Assignment #2 (Suggested Answerkey)
Q #s 2 & 9 of Ch. 4 in problems and applications
2. Real interest rate = nominal interest rate-inflation rate 11% - inflation rate
Equation of Exchange:
%∆ in Ms + %∆ in V = %∆ in P + %∆ in Y
Or,
%∆ in P
= %∆ in Ms + %∆ in V
- %∆ in Y
Substituting the values, we get as follows:
%∆ in P
= 14% +0%- 5% = 9%
Therefore, real interest rate = 11% -9% = 2%
9. The website economist.com is not free resources. The info is available to
paid subscribers only.
However, imf.org has a lot of free resources
including inflation data by country (
www.imf.org
) for comparison. For
example, in 2001 data shows that Turkey had one of the highest inflation
rate (69%) and monetary growth rate (M1 55%, M2 52%) along with
nominal interest rate of 54%. At the same time, the CPI growth rate and Ms
growth rate for the US were 2% and 8% respectively along with nominal
interest rate growth at 2%. These data are fully consistent with the theories
that high inflation economies will have high Ms growth rates and high
nominal interest rates.
Q #s 2, 3, 5, 6, 7, 8, 9, &10 of Ch. 5 in problems and applications
2. a.
S = Y- C – G = 5,000- 250 - 0.75(5,000-1,000) -1,000 = 750
I = 1,000 – 50 X 5 = 750; (r =r* = 5)
NX = S-I = 750- 750 = 0
NX = 0 = 500-500e; e = 500/500 =1
2.b. S = Y-C – G = 5,000- 250 -.75(5,000-1,000) -1,250 = 500