MACROECONOMICS W/CONNECT
18th Edition
ISBN: 9781307253092
Author: McConnell
Publisher: Mcgraw-Hill/Create
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Question
Chapter 9, Problem 9RQ
To determine
The minimum acceptable nominal interest rate.
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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
Suppose there are 1200 units of money on an island, but money grows by 5.32% per year. Islanders spend each unit of money 2.3 times per year on average and this spending grows by 1.98%. The price level is at 34. GDP is expected to grow at 4.83%. What is the level of inflation? Answer this as a percentage without the percentage sign and round this to two digits after the decimal. ex. If you found the rate to be 5.125%, answer 5.13.
Abhijit deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Abhijit withdraws his $105. If inflation was 7 percent during the year the money was deposited, then Abhijit’s purchasing power has increased by 2 percent.
Select one:
True
False
Chapter 9 Solutions
MACROECONOMICS W/CONNECT
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
- Suppose a nominal interest rate is 12%, and the expected rate of inflation is 9%. If next year the expected rate of inflation rises to 11%, what would most likely happen as a result?arrow_forwardSuppose you take out a multi-year loan from a bank with an intrest rate of 5%. a. The rate you are paying is the (Click to select) v interest rate. b. If the inflation rate is 2%, the real interest rate you are paying on the loan is %. c. Now suppose the following year there is unexpected inflation, and the price level increases by 7%. The real interest rate on your loan that year would be %. d. Unexpected inflation hurts (Click to select) v and helps (Click to select) e. If lenders expect higher rates of inflation, they will charge (Click to select) interest rates.arrow_forwardThe Nominal Interest rate and inflation rate in an economy is same. What will be the real interest in such case?arrow_forward
- Assume the nominal interest rate is 17 percent and the expected rate of inflation is 12 percent. Calculate real rate of interest.arrow_forwardSuppose 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?arrow_forwardHow 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_forward
- if the nominal interest rate is 18 percent and the real interest rate is 10 percent, the inflation rate isarrow_forwardassume instead that the nominal interest rate is 4 percent and the expected rate of inflation is minus 1 percent. Calculate the real rate of interest.arrow_forwardIf the nominal interest rate on an asset is 10% and inflation is also 8%, what is the real interest rate of that asset? What if inflation is 12%?arrow_forward
- Suppose 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_forwardFrank is lending $1,000 to Sarah for two years. Frank and Sarah agree that Frank should earn a 2 percent real return per year. Instructions: Enter your responses as as whole numbers. a. The CPI (times 100) is 100 at the time that Frank makes the loan. It is expected to be 110 in one year and 121 in two years. What nominal rate of interest should Frank charge Sarah? The nominal rate of interest charged should be %. b. Suppose Frank and Sarah are unsure what the CPI will be in two years. How should Frank index Sarah's annual repayments to ensure that he gets an annual 2 percent real rate of return. Frank should charge Sarah) % (Click to select) the inflation rate.arrow_forwardDarla takes out a home loan from a bank. The bank's goal is to make 4% real interest on the loan. If the bank's economists predict that inflation will be 3.5% over the period before the loan is repaid, the bank should charge a nominal interest rate of percent. (Enter your answer "as a percent, but without the percentage sign." In other words, if you think the bank should charge 99.9 percent interest, just put 99.9 in the blank.)arrow_forward
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