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Homework 4. Q4 (a)Suppose that the velocity of circulation of money is constant, but GDP is...

Homework 4. Q4
(a)Suppose that the velocity of circulation of money is constant, but GDP is not and assume that GDP grows by 5% per year, the quantity of money grows by 14% a year and the nominal interest rate is 11%, can you calculate the real interest rate?(Hint: you should use the equation ∆M +∆V = ∆P +∆Y and the Fisher equation.)
(b)Do you believe that people can have expectations that are consistently wrong in the long-run? In other words, do you believe that expectations are right on average? Why or why not?
(c)As mentioned above, V is fairly constant in the long run in the States and other “stable” countries. But there are times/places in which V is not constant, can you explain in which case the velocity of circulation of money will not be constant? Explain carefully your answer!

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1 real interest rate=nominal rate-real Gdp growth rate=14-5=9%

2 Yes they can be wrong. This is because economic phenomenon is not always same. It changes frequently and it is quite difficult for ordinary people to understand full implications

3 Due to technological improvements in monetary system Velocity can change. Similarly war etc can change it

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