Velocity in the country of Aquilonia is always stable.In 2014,the money supply was $100 billion,nominal GDP was $500 billion,and the real interest rate was 3 percent.In 2015,the money supply was $105 billion,and real GDP did not change from its level in 2014.What was the approximate nominal interest rate in 2015?

Question

Quizplus · Accepted Answer

The velocity of money is stable, so the equation of exchange (MV = PY) holds. In 2014, V = 500/100 = 5. In 2015, with the same real GDP and increased money supply, nominal GDP is 105 * 5 = 525. The inflation rate is (525-500)/500 = 5%. Using the Fisher equation, nominal interest rate = real interest rate + inflation rate = 3% + 5% = 8%.

Velocity in the Country of Aquilonia Is Always Stable