1. 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. The goverment raises taxes by $100 billion. If the marginal propensity to consume is 0.6, what happens to the following? Do they rise or fall? By what amounts?

a. Public saving

b. Private saving

c. National saving

d. Investment

% Change in M + % Change in V = % Change in P + % Change in Y.

i.e, % Change in P = % Change in M + % Change in V – % Change in Y.

% Change in P = 14% + 0% – 5% = 9%.
% Change in P is the inflation rate π. From the Fisher equation, we have
i = r + π,
i is the nominal interest rate and r is the real interest rate. i is given as 11% in the problem, and we just calculated above that π is 9%. Hence, r is 2%

1. To calculate the real interest rate, we need to use the Fisher equation, which states:

Nominal interest rate = Real interest rate + Expected inflation rate

In this case, the nominal interest rate is given as 11 percent. Since the velocity of money is constant, the growth rate of the money stock (14 percent) can be considered as the expected inflation rate. Therefore, we can rewrite the Fisher equation as:

11% = Real interest rate + 14%

Simplifying this equation, we can find the real interest rate:

Real interest rate = 11% - 14%
Real interest rate = -3%

Therefore, the real interest rate in Wiknam is -3%.

2. Let's examine the impact of a $100 billion increase in taxes on the various variables:

a. Public saving:
Public saving is the difference between government revenue (taxes) and government expenditure. When taxes are increased, government revenue increases, leading to an increase in public saving.

b. Private saving:
Private saving is the difference between disposable income and consumption expenditure. When taxes are increased, disposable income decreases, which leads to a decrease in private saving.

c. National saving:
National saving is the sum of public and private saving. Based on the above analysis, public saving increases while private saving decreases. Therefore, the overall effect on national saving will depend on the relative magnitudes of the changes in public and private saving.

d. Investment:
Investment is typically financed by national saving. If national saving increases, it can lead to an increase in investment. However, if private saving decreases more than public saving increases, the overall effect on investment may be negative.

Without further information on the specific magnitudes of the changes in public and private saving, it is difficult to determine the exact impact on national saving and investment.

1. To find the real interest rate, we need to use the Fisher equation, which states that the real interest rate is equal to the nominal interest rate minus the rate of inflation.

First, let's find the rate of inflation. The rate of inflation can be calculated using the Fisher equation as follows:

Rate of inflation = nominal interest rate - real GDP growth rate

In this case, the nominal interest rate is 11 percent and the real GDP growth rate is 5 percent. So,

Rate of inflation = 11% - 5% = 6%

Now, we can find the real interest rate by subtracting the rate of inflation from the nominal interest rate:

Real interest rate = nominal interest rate - rate of inflation

Real interest rate = 11% - 6% = 5%

Therefore, the real interest rate in Wiknam is 5%.

2. When the government raises taxes by $100 billion and the marginal propensity to consume is 0.6, the following changes occur:

a. Public saving: Public saving is the difference between government revenue (taxes in this case) and government expenditure. Since taxes have increased by $100 billion, public saving will increase by the same amount, i.e., by $100 billion.

b. Private saving: Private saving is the difference between disposable income (total income minus taxes) and consumption. When taxes increase by $100 billion, disposable income decreases, leading to a decrease in private saving. The change in private saving can be calculated as the change in disposable income multiplied by the marginal propensity to consume. In this case, the change in private saving will be -0.6 * $100 billion = -$60 billion.

c. National saving: National saving is the sum of public saving and private saving. Since public saving has increased by $100 billion and private saving has decreased by $60 billion, national saving will increase by the difference, i.e., by $40 billion.

d. Investment: Investment is financed by national saving, so any change in national saving results in a corresponding change in investment. Since national saving has increased by $40 billion, investment will also increase by $40 billion.

Therefore, the changes are as follows:
a. Public saving: Rises by $100 billion.
b. Private saving: Falls by $60 billion.
c. National saving: Rises by $40 billion.
d. Investment: Rises by $40 billion.