Homework Set 10 Essay

Unit 6: In no more than 300 words, explain how changes in the Bank of England’s official rate can modify the impact of foreign inflation on domestic inflation.

There are two explanations for this. On one hand, anticipating an inflationary trend can force a consumer to purchase a house because of his understanding that the market is likely to go even higher than it currently is. On the other hand,

1. Describe and the biological and psychological factors that contribute to crime and deviance within our society today. There are many factors that suggest that abnormal human traits tend to lead someone to the life of crime. The trait theories are divided into two groups – biological makeup and psychological ideals. The biological makeup tends to say that they the physical and mental makeup of someone tends to make them either lead a life of crime or know the difference. Cesare Lombroso studied “scientific” factors of crime and came up with some very interesting theories about the mental/physical aspects of criminal traits and activities.

26. A financial manager has detrermined that the appropriate rate discount for a foreign project is 17 percent. However, that discount rate applies in the United States using dollars. What discount rate should be used in the foreign country using the foreign currency? The inflation rate in the United States and in the foreign country is expected to be 3 percent and 8 percent, respectively.

(c)TIPS are simultaneously related to change of inflation rate which means the principal and coupon will adjust instantly to change of inflation rate. TIPS like Regular Treasury bonds

1) You can call the module several times instead of writing it out each time.

Convert the following Fahrenheit temperature to an equivalent Celsius temperature. Round to the nearest hundredth, if necessary. –162°F

8) A) The problems with the discount rate being a nominal rate and the cash flows a real rate is the fact that the discount rate is inflation adjusted and the cash flows are not. Therefore the discount rate should subtract inflation due to the fisher effect, nominal = real plus inflation to have the same “rate” as the cash flows or the cash flows should take into account inflation. If not the cash flows are understated or the discount rate is too high.

anticipated” (Gwartney, et al, 2013, p. 209). When you have a 1 percent inflation when 4 percent inflation was expected those that are in the lending business gain profit. This is due to those that are paying back loans are paying with a dollar that has more purchasing power. The lenders return is greater because the interest rate is up by inflation. Therefore, it is at the expense of the one who borrowed the money because the loan then becomes more expensive. If inflation is higher the borrower benefits because the money becomes more valuable and the amount repaid is fixed. The value of the dollar, over time, that has to be repaid becomes less. However, if inflation moves in an unexpected direction neither the borrower nor the lender gain any benefits.

When dealing with interest rates and inflation the standard equation that is used is Fisher equation. What the fisher equation explains is that the real interest rate and expected inflation equals to the nominal interest rate (it = rt + Etπt+1) This means that a rise in expected inflation causes lenders to raise their nominal interest rates as there would be a decrease in the value of their loans due to purchasing power of repayments being lower and this causes the decline in investment as borrowing costs rise.

Because inflation is one of the most crucial indexes for citizens and government to evaluate the overall performance of a country’s economy, it has been widely examined and analyzed by economists throughout history. Back in the 18th century, though the term “inflation” was not adopted by writers focusing on the science of economics yet, two influential thinkers in Europe already included their view about the cause and subsequent effect of a general rise in price for goods in their works. During the period when gold and silver were still the major types of money in circulation, David Hume and Adam Smith both described the ensuing effect in the society of an increase in the money supply: prices would be relatively higher and inflation would occur. While Hume writes mostly on the intermediate situation between the increase of money supply and the rise of price level, Smith focuses on the effect that inflation has on creditors and borrowers. The authors explain the process and effect of inflation in two different ways and hold dissimilar attitude toward inflation. Although they both agree on the increase of species as the cause of inflation, Hume concentrates his investigation on the labor market and claims that inflation benefits the whole society in the short run while Smith considers price inflation from the perspective of finance and maintains that it leads to unfair redistribution of wealth.

Increase in money supply not supported by an increase in output and gross domestic production often leads to hyperinflation.

Although lenders receive 7% a year on their loans, their real return after inflation rate is just 2%.

When looking at the advantages and disadvantages of inflation, it is important to consider what type of inflation is occurring. For example,

Question 1: Effects of Cash Reserve Ratio Reduction on Inflation, Money Supply, Employment Rates and Gross Domestic Product