Question

# suppose that the interest rate on your passbook savings account is 4 percent per year and...

suppose that the interest rate on your passbook savings account is 4 percent per year and this year's inflation rate is 5 percent. Are you better off or worse?

Assume that the consumer price index equaled 50 in 1960 and 150 in 1990. Suppose that you had 60 in 1990 to purchase goods and services. How much money would you have needed in 1960 to buy the same amount of goods and services

If the government today decides that aggregate demand is deffiicient and is causing a recession, what is it likely to do? What if the government decides that aggregate demand is excessive and is causing inflation?

1. The real interest rate = Nominal interest rate - Inflation rate

= 4% - 5% = -1%

Since real interest rate is negative,therefore, you are worse off.

2. Money needed in 1960 to buy the same amount of goods and services = 60 * (50 / 150) = \$20

3. To overcome recession, government should increase government spending so that income will be generated in the hands of people, so that, aggregate demand can be increased.

To check inflation, government should decrease government spending so that aggregate demand can be decreased.

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