Question

Suppose the one year nominal interest rate is 3 percent and that the expected inflation is equal to 4 percent. The price index over this one year period went from 218 to 223. Compare the ex-ante real rate of interest to the ex-post real rate of interest. Which real rate of interest would you more likely be willing to spend today and which real rate of interest would you more likely be willing to save and why?

Answer #1

Define inflation? compare and contrast the real rate of return,
the nominal rate of return, and the ex ante nominal rate of return,
using either real-life examples or hypothetical examples.

Distinguish between the nominal rate and the real rate of
interest. How does inflation affect the real, ex post (after the
fact) rate of return to investors?

3. Distinction Between Real and Nominal Interest Rates
a. Distinguish between a nominal versus a real interest
rate.
b. If a bond gives you a 4% nominal annual interest rate and the
inflation rate over the year is 2%, what is the real ex post rate
of return you receive? Real Rate You Receive _______________
c. If an investor wants a real rate of return of 2% and expects
inflation to be 2% next year, what nominal rate should the...

Suppose Thad loans Alyssa $1000 for one year at 10% nominal
interest rate (i = 10%). The price of a cup of coffee is $2 and
everyone expects it to cost $2.04 next year (π e = 2%). At the end
of the year, Alyssa will repay $1100.
a) Based on their expectations, how many cups of coffee are
given up by Thad today? How many does he expect to be able to
consume in one year?
b) What is...

Suppose that the nominal rate of interest is 5% and the expected
rate of inflation is 2%. Whats is the expected real rate of
interest according to Fisher? Calculate the after-tax expected real
rate of assuming a 30% marginal tax rate. If inflation expectations
increase by 2%, what will be the new nominal rate according to
fisher? According to darby/feldstein? What should happen to bond
prices and stock prices if the expected rate of inflation
increase

Suppose the inflation rate is expected
to be 1.1 percent in the U.S. and 1.8 percent in South Korea in
2020.
a.
If the nominal interest rate
on the 10-year U.S. Treasury bond is 2.4 percent, what is the real
interest rate on that instrument?
b.
If the nominal exchange rate
between the U.S. dollar and the South Korean Won is expected to
fall by 5 percent by the end of the year, what is the change in...

Given the nominal interest rate of 13% and the expected
inflation of 15%, then the value of the real interest rate is ___
?
2. With the real interest rate equal to 3% and the expected
inflation equal to 2%, then the value of the nominal interest rate
is___?
3. A lender prefers a (high or lower) real interest rate while a
borrower prefers a (higher or lower) real interest rate higher
lowreal interest rate.

If the nominal interest rate is 3.8 percent, and the real
interest rate is 2.0 percent, then using the Fisher Equation, the
expected inflation must be _______

If the real interest rate was large during the last year, then
a. inflation is expected to exceed the nominal interest rate in the
future. b. inflation is expected to be less than the nominal
interest rate in the future. c. actual inflation was less than the
nominal interest rate. d. actual inflation was greater than the
nominal interest rate.

a. What is realised real interest rate? Can a change in expected
inflation rate affect the realised real interest rate? Explain.
b. Suppose that there is an increase in expected inflation rate
from 3 percent to 6 percent. Given that the after-tax expected real
interest rate remains unchanged at 2 percent and the tax rate is 30
percent, find the original and the new nominal interest rates.
c. Suggest ONE way in which investors can reduce/avoid the risk
of unexpected...

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