Question

- What is the value of the real interest rate in each of the following situations?

- The nominal interest rate is 15%, and the expected inflation rate is 13%.
- The nominal interest rate is 12%, and the expected inflation rate is 9%.
- The nominal interest rate is 10%, and the expected inflation rate is 9%.
- The nominal interest rate is
*5%,*and the expected inflation rate is 1%. - In which of the above situations would you prefer to be the lender? Why?
- In which of the above situations would you prefer to be the borrower? Why?

Answer #1

Real interest rate = Nominal Interest rate - Expected Inflation.

A) Real interest rate = 15 - 13 = 2%

B) Real interest rate = 12 - 9 = 3%

C) Real interest rate = 10 - 9 = 1%

D) Real interest rate = 5 - 1 = 4 %

E) In situation D it will be beneficial to be a lender because the more the real interest rate more will be the value of money that will be received by lender in the future. The borrowers would be worse off under such situation.

F) In situation C it will be beneficial to be a borrower because the borrower benefits from a lower real interest rate—essentially, the money would be borrowed interest-free because of inflation.However, the lender that made the loan would receive less or no real return on the loan.

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.

Over the next year, the real interest rate is 2% and the
expected inflation rate is 5%.
A. What is the nominal interest rate on a one-year loan?
B. Assume that the actual inflation rate turns out to be 3%,
instead of 5%. • Who benefits, the lender or the borrower? • What
is the realized real interest rate on this loan?

If the interest rate on a loan is fixed at 6% over the course of
10 years, and the rate of inflation is currently 2.5%, which of the
following is NOT true?
the real interest rate is less than the nominal interest
rate
the borrower bears the risk of higher inflation
the lender bears the risk of higher inflation
the nominal interest rate is 6% the real interest rate is
3.5%

Describe the difference between nominal
and real interest rates. Calculate the missing value in each of the
following scenarios:
Expected inflation is 4% and the nominal interest rate is 6%,
what is the real interest rate?
The real interest rate is 2% and the nominal interest rate is
3%, what is expected inflation?
Expected inflation is -1% and the real interest rate is 1%, what
is the nominal interest rate?

Suppose that the tax rate is 25% and compute the before-tax real
interest rate and the after-tax real interest rate in the following
situations.
a. Nominal interest rate = 9%, inflation is 4%.
b. Nominal interest rate = 8%, inflation is 3%.
c. Nominal interest rate = 7%, inflation is 4%.

Suppose that the tax rate is 25% and compute the before-tax real
interest rate and the after-tax real interest rate in the following
situations.
a. Nominal interest rate = 9%, inflation is 4%.
b. Nominal interest rate = 8%, inflation is 3%.
c. Nominal interest rate = 7%, inflation is 4%.

Suppose that a borrower and a lender agree on the nominal
interest rate to be paid on a loan. Then inflation turns out to be
lower than they both expected.
(1) True or False: The real interest rate on
this loan is lower than expected.
The lender (2) gains/loses from this unexpected
lower inflation, and the borrower
(3) gains/loses under these circumstances.
Inflation during the 1970s was much higher than most people had
expected when the decade began.
Homeowners who...

QUESTION 2
In the classical model, because of full employment, real
interest rate is
A.
a fixed number.
B.
determined in the labor market equilibrium.
C.
determined in the goods market equilibrium.
D.
none of the above.
10 points
QUESTION 3
Which of the following is NOT considered to be a major function
of money?
A.
a way to display wealth.
B.
medium of exchange.
C.
storage of value or transfer purchasing power into the
future.
D.
none of...

Use the following Taylor rule to calculate what would happen to
the real interest rate if inflation increased by 5 percentage
points. Target federal funds rate = Natural rate of interest +
Current inflation + 1/2(Inflation gap) + 1/2(Output gap)
If inflation goes up by 5 percentage points, the target
(nominal) federal funds rate goes up by ?
percentage points (? percentage points due to the
direct impact of inflation and another ?
percentage points due to an increase in...

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...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 7 minutes ago

asked 16 minutes ago

asked 16 minutes ago

asked 16 minutes ago

asked 23 minutes ago

asked 23 minutes ago

asked 33 minutes ago

asked 35 minutes ago

asked 35 minutes ago

asked 49 minutes ago

asked 1 hour ago

asked 1 hour ago