Principles of Macroeconomics Plus MyLab Economics with Pearson eText (1-semester access) -- Access Card Package (12th Edition)
12th Edition
ISBN: 9780134424026
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Question
Chapter 7, Problem 2.5P
To determine
Identifying best situation suited to borrower and lender.
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If you deposit money in the bank for one year
scenario 1: nominal interest rate = 10%, inflation rate = 0% 
Scenario 2: normal interest rate = 25%, inflation rate = 15%
In which scenario does the real value of the deposit grow the most? Explain.
a. If the economy is currently at full employment, at what level should the central bank set the nominal interest rate?
b. At what level should the central bank set the nominal interest rate if the economy is 20% below potential GDP?
c. Explain the difference between the nominal interest rate and the real interest rate. Using these concepts of the nominal interest rate and the real interest rate explain how lenders can protect themselves from any negative effects of inflation if the inflation is fully anticipated.
In which of the following situations is it least advantageous to be lending?
Select one:
A. The nominal interest rate is 1 percent and the real interest rate is 0 percent.
B. The real interest rate is 2 percent and the nominal interest rate is 10 percent.
C. The nominal interest rate is 4 percent and the real interest rate is -2 percent.
D. The real interest rate is 4 percent and the nominal interest rate is 7 percent.
Chapter 7 Solutions
Principles of Macroeconomics Plus MyLab Economics with Pearson eText (1-semester access) -- Access Card Package (12th Edition)
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Similar questions
- You put money into an account that earns a 8 percent nominal interest rate. The inflation rate is 3 percent, and your marginal tax rate is 25 percent. What is your after-tax real rate of interest? a. 3 percent b. 3.75 percent c. 5 percent d. 6 percentarrow_forwardAssuming 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.arrow_forwardAssume that in Azerbaijan, Alyana deposits $5,000 in the bank for a single year. Given the following cases, answer the questions. CASE 1: inflation = 0%, nominal interest rate = 5% CASE 2: inflation = 5%, nominal interest rate = 10% CASE 3: inflation = 10 %, nominal interest rate = 15% In which case does the real value of your deposit grow the most? Assume the tax rate is 30%. In which case do you pay the most taxes? Compute the after-tax nominal interest rate,then subtract inflation to get the after-tax real interest rate for both cases. Answer all partsarrow_forward
- 1. a. Assume the nominal interest rate is 12 percent and the expected rate of inflation is 8 percent. Calculate real rate of interest.b. Now assume instead that the nominal interest rate is 4 percent and the expected rate of inflation is minus 2 percent. Calculate the real rate of interest.c. Assume the expected rate of inflation is 6 percent per year. What nominal interest rate should you charge to receive a real interest rate of 2 percent per year?arrow_forwardIf the tax is 40 percent compute the before tax interest rate and the after tax real interest rate in the following cases 1 the nominal interest rate is 10 percent and the inflation rate is 5 percent 2 the nominal interest rate is 6 percent and the inflation rate is 2 percent 3 the nominal interest rate is 4 percent and the inflation rate is1 percentarrow_forwardWhich of these is not a negative effect of inflation? a. It lowers down the value of money b. It rises the level of employment c. It increases the price of goods and services d. It lowers down the purchasing power of peoplearrow_forward
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