Macroeconomics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506756
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Chapter 9, Problem 9CQ
To determine
Calculate the estimated real rate of interest and real
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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.
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 9 Solutions
Macroeconomics: Private and Public Choice (MindTap Course List)
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- Suppose 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_forwardConsider 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=-3arrow_forwardAssume you put money into an asset that pays you 7 percent interest and inflation is 5 percent. Which statement is correct? This means the nominal rate of interest is 7 percent and the real rate is 5 percent. This means the real rate of interest is 2 percent. The textbook states that all interest rates would be assumed to be the real rate; thus, the nominal rate is 12 percent. This means the nominal rate of interest is 35 percent. If the rate of inflation falls, your real rate of interest from this asset would also fall.arrow_forward
- Suppose the price of a basket of goods costs $25 in country x and ¥300 in country y. suppose the price level in country x and y is expected to rise by 5% and 10%,respectively, in next year. If the current interest rate in country X is 10%, what would you expect the interest rate to be in country y?arrow_forwardFor a given real interest rate, a decrease in the inflation rate would a. increase the after-tax real interest rate and so decrease saving. b. decrease the after-tax real interest rate and so decrease saving. c. decrease the after-tax real interest rate and so increase saving. d. increase the after-tax real interest rate and so increase saving.arrow_forwardIf Net Investment = 0 in a given year, this indicates that we have neither lost nor gained capital. That seems to be a desirable outcome. Do you agree?arrow_forward
- If the price of your cell phone contract increases from R 700 to R 900 over a period of one year and your income rises from R15 000 to R15 500 during that same period, your nominal income has… a) Increased, and your real income has increased. b) Increased, but your real income has decreased. c) Decreased, and your real income has decreased. d) Increased, but your real income has remained the same.arrow_forwardAfter 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_forwardIf the expected real interest rate of 5% and expected inflation rate of 3%, then the nominal interest rate in year t is approximatelyarrow_forward
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