Interest Rates Suppose that you make a loan of $1,500 to your friend at a rate of 10% interest because you expect the inflation rate to be 5%. a) By how much does your purchasing power increase once the loan is completely paid off? b) Assuming that after the loan was repaid, you discovered that inflation rate over the life of the loan was only 2%. Who gained?

Interest Rates Suppose that you make a loan of $1,500 to your friend at a rate of 10% interest because you expect the inflation rate to be 5%. a) By how much does your purchasing power increase once the loan is completely paid off? b) Assuming that after the loan was repaid, you discovered that inflation rate over the life of the loan was only 2%. Who gained?

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter13: Inflation

Section: Chapter Questions

Problem 7SQP

See similar textbooks

Similar questions

Rosalie the Retiree knows that when she retires in 16 years, her company will give her a one-time payment of 20,000. However, if the inflation rate is 6 per year, how much buying power will that 20,000 have when measured in todays dollars? Hint: Start by calculating the rise in the price level over the 16 years.
Samantha receives a starting salary offer of $60,000 for Year 1. If inflation is 3% each year, what must her salary be to have the same purchasing power in Year 10? Year 20? Year 30? Year 40?
Assume your salary is $55,000 in 2015 and $160,000 in 2045. If inflation has averaged 2% per year, what is the real or differential inflation rate of salary increases?
Assume you have won a lottery prize of $5,000, which works out great since you want to buy a new gaming PC that costs $5,500. You decide to save the lottery winnings for one year by purchasing a bank CD with one year until maturity. The interest rate on your deposit is 12% and inflation is expected to be 8% over the next year. You plan to work part-time to make up any shortfall in your savings covering the cost of the gaming PC one year from now. a. How much money will you have in your bank account at the end of one year? b. What is the real interest rate you expect to earn on your deposit over the next year? c. Will you have enough money from the savings to buy the PC next year? d. If your answer to c. is no, how many hours of work @ $15/hour will be required to make up the shortfall?
Assume a constant inflation rate of 5% annually and 0% interest rate. Over a whole period of 14 years. A real estate investment after 4 years would consume 307,500$. Lasting to 10 years the income is a constant of 170,000$ each year. A) What would be the equivalence selling price for the real estate in year 0?
For a nominal inflation-adjusted interest rate of 24% per year compounded monthly, calculate the real interest rate per month when the inflation rateis 0.5% per month.
Suppose Neha is a sports fan and buys only baseball caps. Neha deposits $3,000 in a bank account that pays an annual nominal interest rate of 5%. Assume this interest rate is fixed—that is, it won't change over time. At the time of her deposit, a baseball cap is priced at $10.00. Initially, the purchasing power of Neha's $3,000 deposit is$______________baseball caps. For each of the annual inflation rates given in the following table, first determine the new price of a baseball cap, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Neha's deposit after one year in the first row of the table for each inflation rate. Finally, enter the value for the real interest rate at each of the given inflation rates. Hint: Round your answers in the first row down to the nearest baseball cap. For example, if you find that the deposit will cover 20.7 baseball caps, you would round the purchasing power down to 20 baseball caps under the assumption that…
Abhijit deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Abhijit withdraws his $105. If inflation was 7 percent during the year the money was deposited, then Abhijit’s purchasing power has increased by 2 percent. Select one: True False
A friend is celebrating her birthday and wants to start saving for her anticipated retirement. She has the following years to retirement and retirement spending goals. Years until retirement: 30 Amount to withdraw each year: $120,000 Years to withdraw in retirement: 25 Interest rate: 7.5% Because your friend is planning ahead, the first withdrawal will not take place until one year after she retires. She wants to make equal annual deposits into her account for her retirement fund. Assume that the inflation rate is 3%. Consequently, when your friend retires she will want to withdraw $120,000 each year in today’s dollars. What amount is she planning to receive in year 31 (the end of her first year of retirement)?
Suppose Cho is a cinephile and buys only movie tickets. Cho deposits $3,000 in a bank account that pays an annual nominal interest rate of 10%. Assume this interest rate is fixed—that is, it won't change over time. At the time of her deposit, a movie ticket is priced at $15.00. For each of the annual inflation rates given in the following table, first determine the new price of a movie ticket, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Cho's deposit after one year in the first row of the table for each inflation rate. Finally, enter the value for the real interest rate at each of the given inflation rates. Hint: Round your answers in the first row down to the nearest movie ticket. For example, if you find that the deposit will cover 20.7 movie tickets, you would round the purchasing power down to 20 movie tickets under the assumption that Cho will not buy seven-tenths of a movie ticket. Number of tickets Cho can purchase options:…
Suppose Cho is a cinephile and buys only movie tickets. Cho deposits $3,000 in a bank account that pays an annual nominal interest rate of 10%. Assume this interest rate is fixed—that is, it won't change over time. At the time of her deposit, a movie ticket is priced at $15.00. For each of the annual inflation rates given in the following table, first determine the new price of a movie ticket, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Cho's deposit after one year in the first row of the table for each inflation rate. Finally, enter the value for the real interest rate at each of the given inflation rates. Hint: Round your answers in the first row down to the nearest movie ticket. For example, if you find that the deposit will cover 20.7 movie tickets, you would round the purchasing power down to 20 movie tickets under the assumption that Cho will not buy seven-tenths of a movie ticket. Fill in the annual inflation chart Choices…
Suppose Latasha is a cinephile and buys only movie tickets. Latasha deposits $3,000 in a bank account that pays an annual nominal interest rate of 5%. Assume this interest rate is fixed—that is, it won't change over time. At the time of her deposit, a movie ticket is priced at $10.00. Initially, the purchasing power of Latasha's $3,000 deposit is_______ movie tickets. For each of the annual inflation rates given in the following table, first determine the new price of a movie ticket, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Latasha's deposit after one year in the first row of the table for each inflation rate. Finally, enter the value for the real interest rate at each of the given inflation rates. Hint: Round your answers in the first row down to the nearest movie ticket. For example, if you find that the deposit will cover 20.7 movie tickets, you would round the purchasing power down to 20 movie tickets under the…