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# Interest Rate and Velocity

1) Your college has agreed to give you a \$10,000 tuition loan. As part of the agreement, you must repay \$12,600 at the end of the 3-year period. What interest rate is the college charging?

2) A country's gross domestic product (GDP) is \$20 billion and its money supply (MS) is \$5 billion.

a) What is the country's velocity of money (VM)

b) If the MS stays at the same level next year while the velocity of money "turns over" 4.5 times, what would be the level of GDP?

c) Assume that the VM will turn over four times next year, what will have t be the size of money supply?

#### Solution Preview

1) Your college has agreed to give you a \$10,000 tuition loan. As part of the agreement, you must repay \$12,600 at the end of

the 3-year period. What interest rate is the college charging?

The formula of future value is:
FV = PV * (1+r)^t
Then (1+r)^t = FV/PV
(1+r) = (FV/PV)^(1/t)
r = (FV/PV)^(1/t) - 1

In this case, FV = ...

#### Solution Summary

The solution answers the question(s) below.

\$2.19