EBK ECONOMICS: PRINCIPLES AND POLICY
13th Edition
ISBN: 9781305465626
Author: Blinder
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Question
Chapter 34, Problem 2TY
To determine
The effect of a different real rate of interest on government bonds.
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You take out student loans to help pay for your degree at a 5% annual interest rate. Assume the bank expected inflation to average 3% per year. What real interest rate did they expect to earn from your loan? What happens if inflation is actually 5% per year? Who is better off if inflation is higher than expected? What if it is lower than expected? Why?
Suppose that you also take out a $1,000 loan at the Cavalier Credit Union. The loan agreement stipulates that you must pay it back with 4% interest in one year, and again, the inflation rate is expected to be 2%.
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 3% rather than 2%, who will be helped? Why?
Assume 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?
Chapter 34 Solutions
EBK ECONOMICS: PRINCIPLES AND POLICY
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- How might a rapid rise in inflation harm you? How might a rapid rise in inflation help you? In answering this question consider your role as both a consumer, worker, and borrower. Consider the likely effect on your real wages, and any interest you receive as a saver. Would it be advantageous to borrow money if you expected inflation to rise? Does it make economic sense to open a savings account at a bank given the latest increase in the CPI.arrow_forwardWhether one regards inflation as a “good” thing or a “bad” thing depends very much on one’s economic situation. If you are a borrower, unexpected inflation is a ["", "", "", ""] thing—it reduces the value of money that you must repay. If you are a lender, it is a ["", ""] thing because it reduces the value of future payments you will receive.arrow_forwardSuppose 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_forward
- Explain how the average inflation rates are calculated?arrow_forwardOne of the economic effects of inflation is that it discourages saving and investment. Why? Support your argument with suitable examples.arrow_forwardAfter graduating from college in 2010, Art Major's starting salary is $45757.00. Suppose Art Major has a cost of living adjustment (COLA) clause, or an escalator clause, in his labor contract so that he will be able to maintain this same level of purchasing power in real terms in 2011 and 2012. Using the information in the table, how much will Art Major earn in 2011 and 2012 if his salary keeps up with inflation? Round your answers to the nearest dollar. Year CPI 2010 101.77 2011 105.69 2012 108.04 What is Art Major's salary in 2011? $ What is Art Major's salary in 2012?arrow_forward
- What impact will high and variable rates of inflation have on the economy? How will they influence the risk accompanying long-term contracts and related business decisions?arrow_forwardwhat happens if there is future expected inflation?arrow_forwardWhy do we need to calculate the average inflation rate?arrow_forward
- Does the BLS method of assessing inflation imply that consumers actually purchase the same goods and services year after year?arrow_forwardWhat are the costs of inflation? How high inflation affects the income distribution in the economy? Explain with details.arrow_forwardConsidering the impacts of expected inflation, how might the purchasing power of consumers be affected in the short term?arrow_forward
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