Question

In terms of purchasing power, what happens to Gabriela’s loan from the time she borrows the money to the time she pays it back?

Purchasing power decreases

Purchasing power increases

Purchasing power is unchanged

Unclear

Consider a country called Naira-ville. If the actual GDP is $10,000,000 while the potential GDP is $11,500,000, the unemployment rate is 8% and inflation rate is 6.35%, what is the nominal interest rate predicted by the Taylor Rule?

1.5%

4%

9.5%

13%

Answer 1

Q-1 answer:- purchasing power decreases

Explanation:- purchasing power means the value of money for purchasing goods or services. when inflation increase the purchasing power of money will decrease because of time value. so here the borrowed money will pay back to the lender after a particular time then it will worth less so the purchasing power decrease.

Q-2 Answer:- 1.5

Explanation:-

Nominal interest rate = Neutral rate + 0.5 (GDPe - GDPt) + 0.5 * (Ie - It)

= 0.02 + 0.5(-0.15) + 0.5(0.08)

= 0.02-0.075+ 0.04

= -0.015*100

= 1.5

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