Econ Assignment

Ahmed Nimale

1. Base Year GDP is 20000 and later year is 50000 a. Real GDP in Later year prices is 30000 , Real GDP in base year 20000 b. Real GDP deflator = Nominal GDP/Real GDP 50000/30000 =1.7 (1.667) 2. Nominal interest rate is the cost of holding money. The higher the nominal interest rate, the lower the demand for real money balances. Velocity shows how rapidly money changes hands. Therefore if nominal interest rate is constant so will velocity be constant. a. With an increase in nominal interest rate there comes a comes a lower demand for real money balances thus that means velocity increases because people choose to hold less money because of the opportunity cost of holding money. 3.

4. R is equal to 2. T is 1450 M= 1900, Private savings is 650, public savings is 250 and national savings is 900. a. R is 8, M= 1600 I is 600, private savings is 800, public savings -200 and national savings is 600 b. Part a is under tight fiscal policy and part b is loose fiscal policy. Policy a encourages investment.

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6. Large economies must use contractionary fiscal policy, which decreases government spending or increases taxes to create a lower world interest rate. b) Lower world interest rate increases investment in small open economy, which reduces the supply currency in foreign exchange markets and increases the exchange rate of the small open economy.

c) The trade balance of the small open economy moves into deficit.