Hi, The main question 4 but for the question4 you need to see question 3 Therefore,Can you explain the steps briefly and solve it please 3) Suppose that on January 1, 2019 a bank lends $20,000 to a person. The bank and the individualboth agree that the real interest rate charged on the loan should be 10% and the loan is going to betotally paid ($20,000 plus interest), in a one-time payment, on December 31, 2020. Suppose the twoparties to this transaction can perfectly foresee what the inflation rate for this period is going to be.Given this information, what is the nominal rate the Bank has to charge on this loan? Assume thatthe CPI is computed at the beginning of each year. 4) Assume the same conditions exist as in question 3 but now the bank and the borrower cannotpredict the inflation rate perfectly. Assume that both the bank and the borrower expect an inflationrate of 8% over this period of time. Given this information, what is the nominal rate charged on theloan now? Given the actual inflation rate (from your calculations and the provided data), who winsfrom this loan contract and who loses from this loan contract? Explain your answer fully. What ifthe expected inflation rate is 4% during this period? Does your answer change as to who wins andwho loses? And, if so, why did your answer change?

Ans. 4 Given, Expected inflation rate = 8% Expected Interest Rate= 10% We calculate the Nominal…

4) Assume the same conditions exist as in question 3 but now the bank and the borrower cannot predict the inflation rate perfectly. Assume that both the bank and the borrower expect an inflation rate of 8% over this period of time. Given this information, what is the nominal rate charged on the loan now? Given the actual inflation rate (from your calculations and the provided data), who wins from this loan contract and who loses from this loan contract? Explain your answer fully. What if the expected inflation rate is 4% during this period? Does your answer change as to who wins and who loses? And, if so, why did your answer change?

4) Assume the same conditions exist as in question 3 but now the bank and the borrower cannot predict the inflation rate perfectly. Assume that both the bank and the borrower expect an inflation rate of 8% over this period of time. Given this information, what is the nominal rate charged on the loan now? Given the actual inflation rate (from your calculations and the provided data), who wins from this loan contract and who loses from this loan contract? Explain your answer fully. What if the expected inflation rate is 4% during this period? Does your answer change as to who wins and who loses? And, if so, why did your answer change?

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter12: Money Growth And Intlation

Section: Chapter Questions

Problem 6PA

See similar textbooks

Similar questions

The total price of purchasing a basket of goods in the United Kingdom over four years is: year 1=940, year 2=970, year 3=1000, and year 4=1070. Calculate two price indices, one using year 1 as the base year (set equal to 100) and the other using year 4 as the base year (set equal to 100). Then, calculate the inflation rate based on the first price index. If you had used the other price index, would you get a different inflation rate? If you are unsure, do the calculation and find out.
The index number representing the price level changes from 110 to 115 in one year and then from 115 to 120 the next year. Since the index number increases by five each year, is five inflation rate each year? Is the inflation rate the same each year? Explain your answer.
8) Suppose the Bank of Montreal wants a five percent real rate of return on all its loans, and anticipates an annual inflation rate of four percent. It should therefore lend its money at a nominal interest rate of A) ten percent. B) nine percent. C) five percent. D) four percent. E) one percent. Note:- Please avoid using ChatGPT and refrain from providing handwritten solutions; otherwise, I will definitely give a downvote. Also, be mindful of plagiarism. Answer completely and accurate answer. Rest assured, you will receive an upvote if the answer is accurate.
1. Suppose you’ll have an annual nominal income of $40,000 for each of the next 3 years, and theinflation rate is 5 percent per year. a. Find the real value of your $40,000 salary for each of the next 3 years. b. Suppose you have a COLA (Cost of Living Adjustment) of 5 percent per year in yourcontract, which raises your $40,000 salary by 5 percent for each of the next 3 years. Giventhe 5 percent inflation rate for each of those 3 years, what is the real value of your salary foreach year?