In 2018, the nominal interest rate on bonds was 5 percent a year and the real interest rate was 2 percent a year. Investment was 2.7$ trillion and the government budget deficit was 0.5$ trillion. By 2020, the real interest rate had increased to 5 percent a year, but the nominal interest rate increased to 4 percent a year. Investment has crashed to 1.8$ trillion and the government budget deficit had climbed to 3.8$ trillion. Assume that the private demand for and private supply of loanable funds did not change between 2018 & 2020. What was the inflation rate in 2018 and 2020? What happened to the price of bond between 2018 and 2020? Did the change in the government budget deficit crowed out some investment?
In 2018, the nominal interest rate on bonds was 5 percent a year and the real interest rate was 2 percent a year. Investment was 2.7$ trillion and the government budget deficit was 0.5$ trillion. By 2020, the real interest rate had increased to 5 percent a year, but the nominal interest rate increased to 4 percent a year. Investment has crashed to 1.8$ trillion and the government budget deficit had climbed to 3.8$ trillion. Assume that the private demand for and private supply of loanable funds did not change between 2018 & 2020. What was the inflation rate in 2018 and 2020? What happened to the price of bond between 2018 and 2020? Did the change in the government budget deficit crowed out some investment?
Chapter16: Working Capital Policy And Short-term Financing
Section: Chapter Questions
Problem 24P
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Question
In 2018, the nominal interest rate on bonds was 5 percent a year and the real interest rate was 2 percent a year. Investment was 2.7$ trillion and the government budget deficit was 0.5$ trillion.
By 2020, the real interest rate had increased to 5 percent a year, but the nominal interest rate increased to 4 percent a year. Investment has crashed to 1.8$ trillion and the government budget deficit had climbed to 3.8$ trillion.
Assume that the private demand for and private supply of loanable funds did not change between 2018 & 2020.
- What was the inflation rate in 2018 and 2020?
- What happened to the price of bond between 2018 and 2020?
- Did the change in the government budget deficit crowed out some investment?
- What happened to the demand for loanable funds between 2005 and 2009? How do you know?
- What happened to the quantity of saving and investment?
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