Reference no: EM132471763

1. In South Korea over the past several years, the real GDP, Y, of has been growing by 3 percent per year and the price level, P, also by 3 percent (that is, DP/P = 0.03 and DY/Y = 0.03). The nominal interest rate, i, has remained constant, the money market has been in equilibrium, and money demand can be represented by M^d = kPY/i, where k is a constant parameter. The money market equilibrium implies M^s= kPY/i, where M^s is the money supply. For the purposes of this question, please use the growth form of the equation for the money market equilibrium, DM^s/M^s @ DP/P + DY/Y - Di/i, which is a close approximation of the original because the growth rates are small numbers.

(a)  At what rate has the South Korean money supply been growing (i.e., what is DM^s/M^s)? Please show your calculations.

(b)  Suppose this year South Korea's real GDP growth jumps to 4 percent. If rates of growth of the price level and money supply remain the same as in the recent past, what will happen to the nominal interest rate in Korea? Please find the growth rate of the interest rate, and show your calculations.

(c) In question 1(b) when GDP grows at the rate of 4 percent and the price level grows at the rate of 3 percent, if the central bank of South Korea wants to keep the nominal interest rate constant as in the past, at what rate should it increase the money supply? Please show your calculations.