Microeconomics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506893
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Question
Chapter 14, Problem 8CQ
To determine
Calculate the estimated real rate of interest.
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Consider the market for loanable funds. Suppose the demand for loans is given be i=9-Q+π, and the supply of loans is given by i=Q/2+π, where π represents inflation. In the case of π=3, what is the real interest "r" rate given the equilibrium values found in the last question?
r=0
r=3
r=6
r=-3
Suppose you purchase a $1,500 TIPS on January 1, 2020. The bond carries a fixed coupon rate of 5.5 percent. Over the first two years, semiannual inflation is 1.5 percent, 1.5 percent, 4 percent, and 3 percent, respectively. What is the principal at the end of month 6?
Explain why you agree or disagree with the following statement:“Negative real interest rates cannot exist in an economy that is properly functioning.”
Chapter 14 Solutions
Microeconomics: Private and Public Choice (MindTap Course List)
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- Suppose 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_forwardAssume the expected rate of inflation is 3 percent per year. What nominal interest rate should you charge to receive a real interest rate of 2 percent per year?arrow_forwardSuppose that the investment function is I = 3,500 − 100r, where r is the real interest rate (in percent). If the nominal interest rate is 12 percent and the inflation rate is 4 percent, then total investment will be:arrow_forward
- After staying virtually flat for about a year and a half, the average lending rate of banks has started to show signs of decline in April after the Bank of Ghana reduced the monetary policy rate the month before. The Summary of Economic and Financial Data (May 2020) published by the Bank of Ghana has shown that average lending rate has finally moved out of its comfort zone to a step downward. Prior to recording 22.38 percent in April, the average lending rate has since the past 17 months (December 2018) not come below 23%.How would banks benefit when interest rates decrease?arrow_forwardConsider the market for loanable funds. Suppose the demand for loans is given by i= 40-Q+π, and the supply of loans is given by i= -30+Q+π, where π represents inflation. In the case of π=5, what is the equilbrium quantity of loans and what is the corresponsing interest rate? Q*=70, i*=45 Q*=10, i*=35 Q*=35, i*=10 Q*=45, i*=70arrow_forwardIf Dave loans funds at 2 percent while the inflation rate is 4 percent, his real rate of interest is -2 percent?arrow_forward
- Suppose banks require a real interest rate of 12 percent. If they expect inflation to be 3 percent, what is the nominal interest rate? Multiple Choice 36 percent 15 percent 9 percent 4 percentarrow_forwardWage agreements and loan contracts are two types of multiperiod agreements that are important for economic growth. Suppose you sign a two-year job contract with Wells Fargo stipulating that you will receive an annual salary of $93,500 plus an additional 2% above that in the second year, to account for expected inflation. If the inflation rate turns out to be 3% rather than 2%, who will be hurt? Why? If the inflation rate turns out to be 1% rather than 2%, who will be hurt? Why?arrow_forward
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