60) Suppose that the forecast for next year's annual inflation rate is a = 5%, and for the annual interest rate is i = 4%.a) What will be the corresponding real rate of interest for the next year?b) Using the values of a and i in part a), suppose you borrow $10 000 for a year at i = 4% and buy 5000 units of a certainitem that has a current cost of $2 per unit. If the price of this item is tied to a rate of inflation, a = 5%, and you sell the itemsone year from now at the inflated price, what will be your net gain on this transaction?

In economics, interest refers to the amount paid in excess of the principal amount by the borrower…

Answered: 60) Suppose that the forecast for next…

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter22: Inflation

Section: Chapter Questions

Problem 33P: The index number representing the price level changes from 110 to 115 in one year and then from 115...

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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.
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The real risk-free rate is 4%. Inflation is expected to be 3% this year, 4% next year, and then 3% thereafter. The maturity risk premium is estimated to be 0.0003 x (t - 1), where t = number of years to maturity. What is the nominal interest rate on a 7-year Treasury security? Do not round intermediate calculations. Round your answer to two decimal places.
If you deposit $10,000 in a bank account that pays a 2% interest compounded monthly for five years,what would be your economic loss if the general inflation rate is 3% during that period?
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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?
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If you deposit $12,000 in a bank account that pays a 4% interest compounded monthly for five years, what would be your economic loss if the general inflation rate is 5% during that period?

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