Answer:
(a) 8%
(b) 5%
(c) 4%
Explanation:
According to the classical quantity theory of money,
Money supply × Velocity = Price Level × Real GDP
Money supply denoted by M
Velocity is denoted by V
Price level is denoted by P
Real GDP is denoted by Y
Therefore,
Change in M + Change in V = Change in P + Change in Y
Since, we know that V is constant, so V = 0
∴ Change in M = Change in P + Change in Y
(a) Nominal GDP = Price × Real GDP
Change in P + Change in Y = Change in Nominal GDP = Change in M
Change in M = 8%, it is given in the question.
Therefore, Change in Nominal GDP = 8%
(b) Change in M = Change in P + Change in Y
8% = Change in P + 3%
Change in P = 8% - 3%
= 5%
We know that change in price level is the inflation rate. Hence, the inflation rate is equal to the 5%.
(c) Real interest rate is the difference between the nominal interest rate and the inflation rate.
Real interest rate = Nominal interest rate - Inflation rate
= 9% - 5%
= 4%
