The nominal interest rate is 6% of an economy where constant velocity has real gdp growth of 3 percent.
The nominal interest rate is the amount that banks, debt issuers, and investment companies advertise for loans and different types of investments. It is the stated interest rate that is earned by the investor or lender and paid to them.
According to the Information Provided:
Y = 3% real GDP growth
M=7% money growth
Real interest rate equals 2%, or r.
Constant velocity equals 0%
We need to find the nominal interest rate.
The following is the quantity theory of money (QTM) equation:
ΔM + ΔV = ΔP + ΔY
ΔP = ΔM + ΔV – ΔY
Using the percentages in the problem as a guide,
ΔP = ΔM + ΔV – ΔY
ΔP = 7% + 0% – 3%
ΔP = 4%
Real and nominal interest rates are related by the Fisher equation, which is given by
Nominal interest rate- inflation = real interest rate.
The equation is rearranged to find nominal interest
Real interest rate+ inflation = nominal interest rate.
Interest rate nominal = 2% plus 4%
Hence, 6% is the nominal interest rate.
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