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In 2022, real GDP in Country X grew by 2%, the money supply rose by 3%, and the nominal interest rate was 0%.Thus, the inflation rate was %, and the real interest rate was %, assuming the velocity of money (V) remained fixed.Note: Do not add percentage signs to your answers; e.g. if you calculate the inflation and real interest rates as 4% and -2%, enter your answers as 4 and -2, respectively.

Question

In 2022, real GDP in Country X grew by 2%, the money supply rose by 3%, and the nominal interest rate was 0%.Thus, the inflation rate was %, and the real interest rate was %, assuming the velocity of money (V) remained fixed.Note: Do not add percentage signs to your answers; e.g. if you calculate the inflation and real interest rates as 4% and -2%, enter your answers as 4 and -2, respectively.

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Solution

To calculate the inflation rate, we can use the Quantity Theory of Money, which states that the money supply times the velocity of money equals the price level times real GDP. If the velocity of money is constant, then the growth rate of the money supply minus the growth rate of real GDP equals the inflation rate.

So, the inflation rate is the growth rate of the money supply (3%) minus the growth rate of real GDP (2%), which equals 1%.

The real interest rate is the nominal interest rate minus the inflation rate. Given that the nominal interest rate is 0%, the real interest rate is 0% - 1% = -1%.

So, the inflation rate is 1 and the real interest rate is -1.

This problem has been solved

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