1. Calculate the following: a) real interest rate if expected inflation is 3% and nominal interest rate is 2%, b) real interest rate if nominal interest rate is 50% and expected inflation is 44% c) nominal interest rate if expected deflation is -5% and real interest rate is 5%

1. Calculate the following: a) real interest rate if expected inflation is 3% and nominal interest rate is 2%, b) real interest rate if nominal interest rate is 50% and expected inflation is 44% c) nominal interest rate if expected deflation is -5% and real interest rate is 5%

Macroeconomics

13th Edition

ISBN:9781337617390

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter14: Money And The Economy

Section: Chapter Questions

Problem 12QP

See similar textbooks

Related questions

Q: You put money into an account that earns a 8 percent nominal interest rate. The inflation rate is 3…

A: The after- tax-real rate of interest is the actual financial benefit from an investment after…

Q: Sean receives a portion of his income from his holdings of interest-bearing U.S. government bonds.…

A: The nominal interest rate can be calculated using following formula-

Q: 2.3 (Inflation and Interest Rates) Using a demand-supply diagram for loanable funds (like Exhibit…

A: The loanable funds theory is a neoclassical model that defines how interest rate is determined in…

Q: Raphael receives a portion of his income from his holdings of interest-bearing U.S. government…

A: please find the answer below.

Q: There is a persistent fear that there will be a high level of deflation. Many economists warn that…

Q: The nominal interest rate will be less than the real interest rate when A. the rate of inflation…

A: The correct option is (c).

Q: After staying virtually flat for about a year and a half, the average lending rate of banks has…

A: After a reduction in monetary policy rate by the government. The Bank of Ghana announced the…

Q: The nominal interest rate is 3.5% and the expected inflation rate is 3.0%. What is the real…

A: The real interest rate is adjusted with inflation but it does not vary with changing inflation as…

Q: expected inflation equals

A: Fisher Effect says that we can calculate the real interest rate by the following formula: r = i - π,…

Q: True or False... There are an infinite number of combinations of real interest rates and inflation…

A: A nominal interest rate of zero is known as the zero lower bound that is the level of the interest…

Q: Antonio receives a portion of his income from his holdings of interest-bearing U.S. government…

A: The real interest rate is defined as nominal interest rate less inflation rate. Savings is a…

Q: 1A) If “the good" has a price of $1,000, i, = 0.01, & r, expected price of this the good next year…

A: Given: 1A) Price (Pt) =$1000 it=0.01 rt=0.02 To find: the expected price of good next year

Q: If the nominal interest rate is less than the real interest rate, we know that both the…

A: Fisher's effect describes the relationship between nominal interest rate and real interest rate.…

Q: For a given real interest rate, a decrease in the inflation rate would decrease the after-tax real…

A: The relationship between real interest rate, inflation rate, and the nominal interest rate has been…

Q: Abhijit deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year…

A: Deposit=$100Annual interest rate=5%Now,Value of deposit after one year=100+5%Value of deposit after…

Q: As the treasurer of a manufacturing company, your task is to forecast the direction of interest…

A: With the ability to foresee changes in interest rates, economists can share their findings with…

Q: Suppose Emma owns an investment portfolio. Last year, she earned a 3.65% portfolio return. During…

A: answer is given below

Q: What is the real interest rate if the nominal interest rate is 8% and the expectedinflation rate is…

A: Nominal interest rate minus inflation rate is the real interest rate. Nominal interest rate is 8%…

Q: Question 5. Suppose that an economy has the real GDP growth of 1% in a given year, the money supply…

A: a. growth rate of output=1%growth rate of the velocity of money=5%growth rate of the money…

Q: There is a persistent fear that there will be a high level of deflation. Many economists warn that…

A: Meaning of Deflation and Inflation: Deflation refers to the downfall in the total spending of the…

Q: if you expect the inflation rate to be 15 percent next year and a one-year bond has a yied to…

A: Inflation rate = 15 Yield to maturity = 7 %

Q: 4. Inflation can redistribute wealth between borrowers and savers. Consider the following four…

A: Inflation is an abnormal increase in the general price level of the economy. As a result, too much…

Q: Let us assume you have $1000 to spend on buying books. Each book costs on average $50 and are…

Q: Suppose the nominal interest rate is 5 percent, the tax rate on interest income is 30 percent, and…

A: The real interest rate is the rate which we get after deducting the rate of inflation from the…

Q: Interest rates can be expressed in real or nominal terms. Which of the following is most correct?…

A: Inflation refers to a rise in the general prices of goods and services.

Q: Suppose you take out a loan at your local bank. The bank expects to earn an annual real interest…

A: The nominal interest rate is the interest rate, arrived without adjusting for inflation, at which an…

Q: 2) The nominal interest rate is equal to the real interest rate if A) Expected inflation is greater…

A: Economics is a branch of social science that describes and analyzes the behaviors and decisions…

Q: Suppose a country has a money demand function (M/P)d= kY, where k is a constant parameter. The money…

A: The money demand function reflects the relationship between the nominal money supply (M), price…

Q: Interest rates adjusted for the effects of inflation are real variables, inflation is a nominal…

A: Any nominal variable adjusted for the effects of inflation is called a real variable.

Q: Using you answer for Question 2, what will be the price per MMBtu of natural gas on June 30, 2022 if…

A: The price per MMBtu can be calculated by using the following equation. Price per MMBtu= Pi*(1+i)t

Q: If the nominal rate of interest is 5 percent for a bond issued by the United States Government and…

A: The interest rate which is adjusted to eliminate the effects of inflation is called the real…

Q: Suppose a country has a money demand function (M/P)d=kY, where k is a constant parameter. The money…

A: Inflation: It refers to the increase in the economy's prices and services. The more inflation in the…

Q: 1. a. Assume the nominal interest rate is 12 percent and the expected rate of inflation is 8…

A: 1.a. Given that, Nominal interest rate = 12% or 0.12 Expected rate of inflation = 8% or 0.08

Q: The nominal interest rate is: A not adjusted by inflation. B less than the real rate of interest…

A: Option (A).

Q: 4. If the nominal interest rate is fixed over the life of a loan, the consequences of inflation…

A: In an economy, there is a significant relationship between nominal rate, real rate and inflation…

Q: Fill-in the correct answer.

A: Since you have asked multiple questions, we will solve the first one for you. The Real Rate of…

Q: Assume you make $140,000 a year. The rate of inflation in the last year was 15%. What would your…

A: Inflation refers to the increase in price level. When inflation occurs in an economy, the purchasing…

Q: The ___ is the nominal interest rate minus the rate of inflation. Question 13 options: real…

A: the real inflqtion rate could be calculated as:Real interest rate =1+ Nominal interest rate1+…

Q: If the nominal interest rate is 4.2 percent and expected inflation rate is 3 percent, the real…

A: real interest rate is the rate which is not corrected for inflation and real interest rate is…

Question

1. Calculate the following:
a) real interest rate if expected inflation is 3% and nominal interest rate is 2%,
b) real interest rate if nominal interest rate is 50% and expected inflation is 44%
c) nominal interest rate if expected deflation is -5% and real interest rate is 5%

2. You want to sell your bond that has a par value of ₱100,000 plus a 5 percent annual coupon rate that will mature after one year. The prevailing interest rate is 8%. Will you be able to sell your bond for ₱100,000 or higher? Explain

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step 3

VIEW

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

Suppose you purchase a $1,500 TIPS on January 1, 2020. The bond carries a fixed coupon rate of 5.5 percent. Over the first two years, semiannual inflation is 1.5 percent, 1.5 percent, 4 percent, and 3 percent, respectively. What is the principal at the end of month 6?
If the nominal interest rate is 4.2 percent and expected inflation rate is 3 percent, the real interest rate equals 7.2 percent. 1.2 percent. 3.6 percent. 12.6 percent. none of the above
assume instead that the nominal interest rate is 4 percent and the expected rate of inflation is minus 1 percent. Calculate the real rate of interest.
Sean receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a low-inflation scenario and a high-inflation scenario. Given the real interest rate of 4.5% per year, find the nominal interest rate on Sean's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate After-Tax Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) 2.0 4.5 8.5 4.5 Compared with lower inflation rates, a higher inflation rate will the after-tax real interest rate when the government taxes nominal interest income. This…
Fill-in the correct answer. p i π rr Qtr 1 0.05 0.06 0.03 Qtr 2 0.03 0.07 0.03 Qtr 3 0.02 0.08 0.03 Qtr 4 0.04 0.05 0.03 "_________" Calculate the annual realized real rate of interest."_________" Find the rate of risk."_________" Find the inflation-adjusted principal.
In which of the following situations is it most advantageous to be saving? Select one: A. The real interest rate is 13 percent and the expected inflation rate is 15 percent. B. The real interest rate is 4 percent and the expected inflation rate is 4 percent. C. The real interest rate is 1 percent and the expected inflation rate is 2 percent. D. The real interest rate is 11 percent and the expected inflation rate is 9 percent. E. The real interest rate is 7 percent and the expected inflation rate is 6 percent.
1. What is the relationship between the time value of money and inflation? 2. Compare simple interest to compound interest. 3. What are the advantages and disadvantages of a fixed principal, fixed interest loan? 4. What is the purpose of a bridge loan? 5. Distinguish between bank discount and simple interest.6. Differentiate between a stated rate of interest and an effective rate of interest. 7. What is the significance of finding the internal rate of return (IRR)? 8. Jill Kramer borrowed $25,000 to pay for a startup business. Jill must repay the loan at the end of five months in one payment with a 6 percent simple interest rate.What is the total amount that Jill must repay in five months?How much interest does Jill repay?9. Joe Jones went to his bank to find out how long it will take for $1,000 to amount to $1,350 at 9 percent simple interest. Solve Joe's problem.
Assume the expected rate of inflation is 3 percent per year. What nominal interest rate should you charge to receive a real interest rate of 2 percent per year?
5. Assuming that nominal interest rates stay the same, an decrease in the rate of inflation would raise the real interest rate, which would tend to: a. increase or decrease investment spending. b. increase investment spending. c. not affect investment spending d. decrease investment spending.
Raphael receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 2.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a low-inflation scenario and a high-inflation scenario. Given the real interest rate of 2.5% per year, find the nominal interest rate on Raphael's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Inflation Rate (Percent) Real Interest Rate (percent) Nominal Interest Rate (Percent) After-Tax Nominal Interest Rate (Percent) After-Tax Real Interest Rate (percent) 2.0 2.5 7.5 2.5
Starting in 2009, the interest rates on Greek government bonds rose to over 20%. What was the most important factor in the increase in long-term rates in this time period? Expected future inflation Default risk premium Expectation that the short-term interest rate would be zero “for an extended period” Rise in Greek household savings
Gavin receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a low-inflation scenario and a high-inflation scenario. Given the real interest rate of 4% per year, find the nominal interest rate on Gavin's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate After-Tax Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) 1.5 4.0 7.0 4.0 Compared with lower inflation rates, a higher inflation rate will (increase/decrease) the after-tax real interest rate when the government taxes…