Suppose that in year 1, Acme Corporation can make a real (inflation-adjusted) return on an investment of 3 percent. Assume thenominal interest rate is 8 percent and the inflation rate is 4 percent.Instructions: Enter your answer as a whole number.a. Using this information, we can conclude that the investment would not be profitableb. Suppose that in year 2, the real interest rate changes to 7 percent while inflation remains constant at 4 percent.In year 2, the nominal interest rate must bepercent. After graduation, you face a choice. You can work for a multinational consulting firm and earn a starting salary (including benefits) of$45,000, or you can start your own consulting firm using $6,000 of your own savings. If you keep your money in a savings account,you can earn an interest rate of 5 percent. You choose to start your own consulting firm. At the end of the first year, you add up all ofyour expenses and revenues. Your expenses include $14,000 for rent, $1,600 for office supplies, $22,000 for labor, and $4,900 fortelephone expenses. After operating your consulting firm for a year, your total revenues are $102,000.Instructions: Enter your answers as a whole number.a. What is your accounting profit?2$b. What is your economic profit?%24

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Suppose that in year 1, Acme Corporation can make a real (inflation-adjusted) return on an investment of 3 percent. Assume the nominal interest rate is 8 percent and the inflation rate is 4 percent. Instructions: Enter your answer as a whole number. a. Using this information, we can conclude that the investment would not be profitable b. Suppose that in year 2, the real interest rate changes to 7 percent while inflation remains constant at 4 percent. In year 2, the nominal interest rate must be * percent.

Suppose that in year 1, Acme Corporation can make a real (inflation-adjusted) return on an investment of 3 percent. Assume the nominal interest rate is 8 percent and the inflation rate is 4 percent. Instructions: Enter your answer as a whole number. a. Using this information, we can conclude that the investment would not be profitable b. Suppose that in year 2, the real interest rate changes to 7 percent while inflation remains constant at 4 percent. In year 2, the nominal interest rate must be * percent.

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter18: Introduction To Macroeconomics: Unemployment, Inflation, And Economic Fluctuations

Section: Chapter Questions

Problem 13P

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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.
Suppose I lend my friend Peter $100 for one year, and he agrees to repay me with interest. We each have an expectation that the inflation rate over the coming year will be 5 percent, and so we agree that he will pay me back at a nominal rate of 7 percent interest. a) What real rate of return do I expect to receive? b) What happens if inflation turns out to be 8 percent over the year? Who is made better off and who is made worse off? c) What happens if inflation turns out to be 3 percent over the year? Who is made better off and who is made worse off?
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Assume that next year’s wage rate will be 3 percent higher than this year’s because of inflationary expectations. The actual inflation rate is 4 percent. At the beginning of next year, will the real wage be higher, lower, or the same as today? Explain. Assume that Mark gets a fixed-rate loan from a bank when the expected inflation rate is 3 percent. If the actual inflation rate turns out to be 4 percent, who benefits from the unexpected inflation: Mark, the bank, neither, or both? Explain. How does each of the following changes affect the real gross domestic product and price level of an open economy in the short run? Explain. The depreciation of the country’s currency in the foreign exchange market.