In the country of Wiknam, the velocity of money is constant. Real GDP grows by 5 Percent per year, the money stock grows by 14 percent per year, and the nominal interest rate is 11 percent. What is the real interest rate?
2) In Wiknam if Real GDP growth slows what would you expect to happen to the inflation rate? Explian using the model why.
3) If Wiknam households expect higher inflation in the coming year, how might that effect Money Demand? How would that affect the real interest rate, the nominal interest rate and actual inflation? (hint: use the chart that links money, prices and interests rates in the textbook)
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