MACROECONOMICS (LL)
21st Edition
ISBN: 9781260186949
Author: McConnell
Publisher: MCG
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Question
Chapter 9, Problem 9RQ
To determine
The minimum acceptable nominal interest rate.
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Suppose I lend my friend Peter $100 for one year, and he agrees to repay me with
interest. We each have an expectation that the inflation rate over the coming year
will be 5 percent, and so we agree that he will pay me back at a nominal rate of 7
percent interest.
a) What real rate of return do I expect to receive?
b) What happens if inflation turns out to be 8 percent over the year? Who is
made better off and who is made worse off?
c) What happens if inflation turns out to be 3 percent over the year? Who is
made better off and who is made worse off?
Suppose that the nominal rate of interest is 6 percent and the inflation premium is 1 percent.
What is the real interest rate? %
Alternatively, assume that the real interest rate is 3 percent and the nominal interest rate is 8 percent.
What is the inflation premium? %
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 percent
Chapter 9 Solutions
MACROECONOMICS (LL)
Ch. 9 - Prob. 1DQCh. 9 - Prob. 2DQCh. 9 - Prob. 3DQCh. 9 - Prob. 4DQCh. 9 - Prob. 5DQCh. 9 - Prob. 6DQCh. 9 - Prob. 7DQCh. 9 - Prob. 8DQCh. 9 - Prob. 9DQCh. 9 - Prob. 10DQ
Ch. 9 - Prob. 11DQCh. 9 - Prob. 1RQCh. 9 - Prob. 2RQCh. 9 - Prob. 3RQCh. 9 - Prob. 4RQCh. 9 - Prob. 5RQCh. 9 - Prob. 6RQCh. 9 - Prob. 7RQCh. 9 - Prob. 8RQCh. 9 - Prob. 9RQCh. 9 - Prob. 10RQCh. 9 - Prob. 11RQCh. 9 - Prob. 1PCh. 9 - Prob. 2PCh. 9 - Prob. 3PCh. 9 - Prob. 4PCh. 9 - Prob. 5PCh. 9 - Prob. 6PCh. 9 - Prob. 7PCh. 9 - Prob. 8P
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Similar questions
- The total price of purchasing a basket of goods in the United Kingdom over four years is: year 1=940, year 2=970, year 3=1000, and year 4=1070. Calculate two price indices, one using year 1 as the base year (set equal to 100) and the other using year 4 as the base year (set equal to 100). Then, calculate the inflation rate based on the first price index. If you had used the other price index, would you get a different inflation rate? If you are unsure, do the calculation and find out.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_forwardIf the nominal interest rate is 10 percent and the inflation rate is 4 percent, then the real interest rate is a. 14 percent. b. 6 percent. c. 2.5 percent. d. .4 percent.arrow_forward
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