Velocity in the country of Aquilonia is always stable.In 2012,the money supply was $100 billion,nominal GDP was $500 billion,and the real interest rate was 3 percent.In 2013,the money supply was $105 billion,and real GDP did not change from its level in 2012.What was the approximate nominal interest rate in 2013?

Question

Quizplus · Accepted Answer

The velocity of money is stable, so the increase in money supply leads to a proportional increase in nominal GDP. With a 5% increase in money supply, nominal GDP also increases by 5%. The Fisher equation states that nominal interest rate = real interest rate + inflation rate. With 5% inflation and a 3% real interest rate, the nominal interest rate is approximately 8%.

Velocity in the Country of Aquilonia Is Always Stable