EBK INTERMEDIATE MICROECONOMICS AND ITS
12th Edition
ISBN: 9781305176386
Author: Snyder
Publisher: YUZU
expand_more
expand_more
format_list_bulleted
Question
Chapter 14, Problem 14.10P
a
To determine
b)
To determine
Whether the current value of bond is $200 even with 3% inflation or not.
c)
To determine
- Value of bond when rate for discounting is used.
- Value of bond when real discount rate of 5% is used.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Assume that you borrow $5,000, and you pay back the $5,000 plus $250 in interest at the end of the year. Assuming no inflation, what is the real interest rate? What would the interest rate be if the $250 of interest had been discounted at the time the loan was made? What would the interest rate be if you were required to repay the loan in 12 equal monthly installments?
Assume a consumer who has current period income y = 200 , future-period income y' = 150, current and future taxes t = 40 and t' = 50, respectively and faces a market real interest rate ofr 005, or 5% per period. The consumer would like to consume equal amounts in both periods, that is, he or she would like to set c = c', if possible. However, this consumer is a faced with a credit market imperfections, in that he or she cannot borrow at all, that is, s>or=20.
(a) Show the consumer's lifetime budget constraint and indifference curves in a diagram.
(b) Calculate his or her optimal current period and future-period consumption and optimal, saving, and show this in your diagram.
Assume a consumer who has current period income y = 200 , future-period income y' = 150, current and future taxes t = 40 and t' = 50, respectively and faces a market real interest rate ofr 005, or 5% per period. The consumer would like to consume equal amounts in both periods, that is, he or she would like to set c = c', if possible. However, this consumer is a faced with a credit market imperfections, in that he or she cannot borrow at all, that is, s>or=20.
(a) Show the consumer's lifetime budget constraint and indifference curves in a diagram. Calculate his or her optimal current period and future-period consumption and optimal, saving, and show this in your diagram.
(b) Suppose that everything remains unchanged. except that now t = 20 and t' = 71. Calculate the effects on current and future con sumption and optimal saving, and show this in your diagram
(d) Now, suppose alternatively that y = 100. Repeat parts (a) and (b), and explain any differences.
Chapter 14 Solutions
EBK INTERMEDIATE MICROECONOMICS AND ITS
Ch. 14.3 - Prob. 1MQCh. 14.3 - Prob. 2MQCh. 14.4 - Prob. 1MQCh. 14.4 - Prob. 1TTACh. 14.4 - Prob. 2TTACh. 14.5 - Prob. 1TTACh. 14.5 - Prob. 2TTACh. 14.5 - Prob. 1MQCh. 14.6 - Prob. 1TTACh. 14.6 - Prob. 2TTA
Ch. 14.6 - Prob. 1MQCh. 14.6 - Prob. 2MQCh. 14.6 - Prob. 1.1TTACh. 14.6 - Prob. 2.1TTACh. 14 - Prob. 1RQCh. 14 - Prob. 2RQCh. 14 - Prob. 3RQCh. 14 - Prob. 4RQCh. 14 - Prob. 5RQCh. 14 - Prob. 6RQCh. 14 - Prob. 7RQCh. 14 - Prob. 8RQCh. 14 - Prob. 9RQCh. 14 - Prob. 10RQCh. 14 - Prob. 14.1PCh. 14 - Prob. 14.2PCh. 14 - Prob. 14.3PCh. 14 - Prob. 14.4PCh. 14 - Prob. 14.5PCh. 14 - Prob. 14.6PCh. 14 - Prob. 14.7PCh. 14 - Prob. 14.8PCh. 14 - Prob. 14.9PCh. 14 - Prob. 14.10P
Knowledge Booster
Similar questions
- An insurer needs to make the following annuity payments to an individual: £2176 paid at the end of each year for the first 15 years and then £2177 paid at the end of each year for the following 12 years. Calculate the total amount of fund the insurer needs to hold today in order to meet these payments, given that the effective rate of interest is: 5.8% pa for the first 7 years and then 6.2% pa thereafter. Express your answer in £s to 2 decimal places. (correct answer = 28787.58)arrow_forwardif you expect the inflation rate to be 15 percent next year and a one-year bond has a yied to maturity of 7 percent, then the real interest rate on this bond is ___%.arrow_forwardImagine you are the owner of a downtown Laredo building that you lease out for a yearly amount of $ 45,000 over a span of five years. Assume that the explicit expenses for maintaining the building are $ 20,000, and an additional implicit cost of $15,000 exists. All earnings and costs occur at the conclusion of each year. Suppose the interest rate is 7.5 percent, Determine the present value for both the stream of: (i) your accounting profits. Show your steps. (ii) economic profits. Show your stepsarrow_forward
- Consider a 3.5 percent TIPS with an issue CPI reference of 185.6. The bond is purchased at the beginning of the year (after the interest payment), when the CPI was 193.5. For the interest payment in the middle of the year, the CPI was 195.1. Now, at the end of the year, the CPI is 199.6 and the interest payment has been made.What is the total return of the TIPS in dollars? What is the total return of the TIPS in percentage?arrow_forwardSuppose you take out a loan at your local bank. The bank expects to earn an annual real interest rate equal to 33%. Assuming that the annualized expected rate of inflation over the life of the loan is 11%, determine the nominal interest rate that the bank will charge you.arrow_forwardSuppose that the interest rate at which Joanne can borrow and lend is 10 percent per year, but she can earn $22,000 with a high school degree. Her tuition and books at college cost $6,000 and her living expenses are $15,000 per year. Savings are deposited at the end of the year they are earned and receive (compound) interest at the end of each subsequent year. Similarly, the loans are taken out at the end of the year in which they are needed, and interest does not accrue until the end of the subsequent year. Now that the interest rate has risen, should Joanne go to college or go to work?arrow_forward
- Over the next three years, the expected path of 1-year interest rate is 4, 1, and 1 percent. Today if you buy $1 of one-year bond and when it matures you use the money you receive to buy another one-year bond, then your expected rate of return for this $1 investment is ____% (round to the nearest integer). If the expectations theory of the term structure is true, then it implies that the current interest rate on 2-year bond must be ____% (round to one decimal place x.x)arrow_forwardOn January 1, 2012, Albert invested $8,000 at 5 percent interest per year for three years. The CPI (times 100) on January 1, 2012, stood at 100. On January 1, 2013, the CPI was 108 on January 1, 2014, it was 115; and on January 1, 2015, the day Albert’s investment matured, the CPI was 117. Find the real rate of interest earned by Albert in each of the three years and his total real return over the three-year period. Assume that interest earnings are reinvested each year and themselves earn interest.Hint: Calculate inflation and real interest for each year and then calculate it for the three years as a whole.Instructions: Enter your responses rounded to one decimal place. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. Year Real rate of interest 2012 % 2013 % 2014 % Total real rate of return: %.arrow_forwardConsider the Brazilian experience with crawling peg ER regime between 1995 and 1999. In this regime, the Brazilian real was being devalued continuously at a 7.5 % rate annually. a)How would the Brazilian nominal interest rate be related to the US nominal interest rate in this regime? (Assume that the US annual interest rate was constant at 8 % during this time period.)arrow_forward
- If the real discount rate is 7% and the inflation rate is 10%, which of the following interest rates will be used to find the present worth of a series of cash flows that are in then-current dollars? a. 10.0% b. 17.7% c. 7.0% d. 10.7%.arrow_forwardLet's say we expect the inflation rate to be 7 percent in a year, 5 percent in two years and 3 percent thereafter. The real risk-free interest rate, r*, is constant at 2%, and the maturity risk premium on government bonds begins at zero on ultra-short-term bonds (with a maturity of several days) and rises to 0.2% on bonds with a one-year maturity. The maturity risk premium increases by 0.2% for each one-year increase in maturity, and the five-year maturity and higher maturity of government bonds are constant at the upper limit of 1.0%. 1) Calculate the interest rates of one year, two years, three years, four years, five years, ten years and twenty years of government bonds.arrow_forwardAnswer these questions, assuming the year begins on 1 July: If the amount in supplies expense is the 31 July adjusting entry, and $1320 of supplies was purchased in July, what was the balance in supplies on 1 July? If the amount in insurance expense is the July adjusting entry, and the original insurance premium was for 1 year, what was the total premium and when was the policy purchased? If $7500 of salaries was paid in July, what was the balance in salaries payable at 30 June 2019? There were no additional amounts of revenue received in advance during July. An amount of $2400 was received for services performed in July. What was the amount of service revenue received in advance at 1 July 2019/30 June 2019? (Hint: Reconstruct the T accounts to help answer these questions.)arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Economics: Private and Public Choice (MindTap Cou...EconomicsISBN:9781305506725Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage Learning
Microeconomics: Private and Public Choice (MindTa...EconomicsISBN:9781305506893Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage Learning
Economics: Private and Public Choice (MindTap Cou...
Economics
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning
Microeconomics: Private and Public Choice (MindTa...
Economics
ISBN:9781305506893
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning