Suppose that the nominal interest rate is 4 percent and the inflation premium is 2 percent. Instructions: Enter your answers as a whole number. a. What is the real interest rate? percent b. Alternatively, assume that the real interest rate is 1 percent and the nominal interest rate is 6 percent. What is the inflation premium? percent

Suppose that the nominal interest rate is 4 percent and the inflation premium is 2 percent. Instructions: Enter your answers as a whole number. a. What is the real interest rate? percent b. Alternatively, assume that the real interest rate is 1 percent and the nominal interest rate is 6 percent. What is the inflation premium? percent

Macroeconomics

13th Edition

ISBN:9781337617390

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter14: Money And The Economy

Section: Chapter Questions

Problem 6WNG

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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 that the nominal rate of interest is 6 percent and the inflation premium is 1 percent. What is the real interest rate? % Alternatively, assume that the real interest rate is 3 percent and the nominal interest rate is 8 percent. What is the inflation premium? %
In which situation is the real interest rate highest? In which situation is the real interest rate highest? A. The nominal interest rate is 25% and the inflation rate 30%. B. The nominal interest rate is 2% and the inflation rate 1%. C. The nominal interest rate is 8% and the inflation rate 5%. D. The nominal interest rate is 11% and the inflation rate 9%.
Assuming the nominal interest rate is positive, ceteris paribus, which of the following statements is correct? a. If the nominal interest rate is 4 percent and the inflation rate is 3 percent, then the real interest rate is 7 percent. b. When the inflation rate is positive, ceteris paribus, the real interest rate will be less than the nominal interest rate. c. When the inflation rate is zero, ceteris paribus, the nominal interest rate will be less than the real interest rate. d. If the nominal interest rate is 5 percent and the inflation rate is 2 percent, then the real interest rate is -3 percent.