MACROECONOMICS (LL)
MACROECONOMICS (LL)
21st Edition
ISBN: 9781260186949
Author: McConnell
Publisher: MCG
Question
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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
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