Reference no: EM132790151
In 2019, Vietnamese economy's real GDP, Y, was 3,738.6 trillion Vietnamese dong, its GDP deflator, P, was 1.6, and its money supply, Ms, was 2,456.7 trillion dongs. The nominal interest rate, i, was 6 percent (i = 0.06), and the money market was in equilibrium. As you know from Module 4 materials, money demand is represented by Md = kPY/i, where k is the propensity to hold money.
(a) What was the propensity to hold money in Vietnam during 2019 (i.e., what was k)?
(b) In 2020, because of COVID-19 pandemic Vietnam's real GDP growth slowed down, but still managed to grow at 2 percent. GDP deflator also grew by 2 percent, but the interest rate declined to 4 percent. If the propensity to hold money remained the same as in 2019, which you calculated in (a) above, by what percent money supply must have grown?
(c ) In question 1(b) in 2020 when the propensity to hold money remained the same as in 2019 and real GDP and the deflator grow both at the rate of 2 percent, if the central bank of Vietnam wanted to keep the nominal interest rate constant at 6 percent as in 2019, at what rate should it have increased the money supply? Assume no change in k and same changes in P and Y as in the setting for question 1(b).
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